Thursday, May 22, 2008

Brown's oil

The oil price has hit $135/bbl. My car cost me £65 !!!! to fill this morning. There is most certainly going to be trouble, some of it obvious and other less so.

Gordon Brown, in his new listening to voters mode, has managed to resit saying he wakes up every morning thinking about the oil price, but he has broadcast some equally lame statements today.

Namely:

    The OPEC cartel in a scandal.
    He is taking action by raising it at the G8/EU.
    He will ask the Saudi's to up production.

I note that he doesn't blame speculators. Given that oil has to be used and can to some degree be substituted for in some applications a long run on oil speculation without basis for that concern seems unlikely to me.

The Americans have been over to beg the Saudi's to up production - they haven't done so.

The following problems exits:

1. Everyone looks like they are operating at peak capacity for their given infrastructure.
2. The ability to supply new infrastructure is limited by the availability of the required skills.
3. Nigeria is still a basket case.
4. Nationalism in South American and Russia is actually casuing oil production to drop and inefficient state monopolies have taken over from the independents.
5. Maybe, just maybe, the Saudi can't increase production for much or any length of time.

5 - is the most important. The Saudi's don't publish their reserve estimates or associate geological information, but some people have speculated from information that is avialable that the Saudi oil production is at capacity and will soon decline. ( See Twilight in the Desert if your interested. )

Here as list of what this means:

A) The Saudi's are in big trouble - even at today's oil prices much of their money goes to supporting the unproductive but reproducing fast section of their population. This could lead to the collaspe of their society and revolution (most likely Islamic) and a blocking of their remaining oil production capability. ( Something the US would not stand for and would almost certainly seize the oil fields near Kuwait - see staying in Iraq isn't so dumb after all ... )
B) The economy is going to have a heart attack - Labour are doomed in the UK.
C) The Economic case for Scottish independence is going to look great on tha back of current oil prices and North Sea oil - Labour are doomed in Scotland.
D) We are going to have to compete with India and China, not just for jobs, but for food, oil and raw materials. Since they make things people want and we generally struggle to do so this look =s bad and will lead to a realignment of wealth. (A large amount of this may already have happened - just who do you think sits at the other end of all our national debt, mortgages etc etc).
E) Thanks to the Blair/Brown years of spin and abdication of responsibility our electricity generation network will not be able to supply the required power shortly. Nuclear can't be built fast enough ( too few resources / skills / competition for the first two from everyone else ). The lights are going out in a few years time - David Cameron take note - this will happen on your watch !

The way out of this is to change the terms of the trade. This means different energy sources ( i.e. Nuclear - lots of Nuclear in the long term ), coal ( yes coal ), even solar and wind. [ Nobody would touch British Energy with a barge poll two years ago - now there's a bidding war ! ] But its almost too late to start - Blair and Brown should have done this years ago.

We will also need to deal with the global shock waves of initial prosperous Arab societies that then collapse, India and China running against their limits and Africa being left behind again.

Or, the oil price could just come down the the $70/bbl that our Labour government predicts for 2020....

[Bit of a rant - but there you go.. ]

4 comments:

wildgoose said...

It's a bubble driven by speculators and the Oil Futures market.

I heard on the Today programme this morning that Goldman Sachs was recommending their clients buy Oil Contracts 8 years in advance!

But if future demand keeps ramping up like this then so does the price leading to a nasty rising price spiral.

The only question is how long the bubble lasts before it bursts, and to what more normal level (but probably still high) price that oil then sinks to.

Man in a Shed said...

There are a set of very different articles in the press right now. Some argue for the bubble - some for peak oil.

The high price should lead to a reduction in demand and an increase in supply.

If its speculation then there are things that cold be done to burn the speculators - the IEA keeps very large mandated stocks of oil. But they would have to be sure before using them.

One bit of news that looks odd is a reported sudden drop in US oil stocks. That's something that bears closer examination.

A combination of the Saudi's troubles ( that can only increase ) and a nuclear Iran or even Islamic Pakistan (Nuclear also) could create mayhem.

Quite frankly its time for the words "Energy policy" to become a bit more popular.

wildgoose said...

Interest Rates are low. Lots of investments (particularly financial) look shaky, and the economy is on a down-turn.

So where to invest?

Well, oil is an essential commodity and its price is rising strongly, suggesting good future returns.

And so the investors pile in.

I know it's a simplistic view of what's happening, and I freely confess to not being an expert outside my IT field - but sometimes the simplest answers really are the best.

But even if I'm right and the price suddenly drops overnight rather sharply in a few months time, we still need a proper Energy Policy as you have said.

Build the Severn Barrage, (picking the least environmentally damaging option), replace our nukes with more modern designs, and build new (clean) Coal-fired power station(s) as well.

Basically, diversify supply and don't leave us a hostage to fortune in an unfriendly world.

The simplest answer once again.

N.B. From memory, the Severn Barrage alone could generate as much 8% of our electricity needs, but only for 16 hours a day. We can't store electricity particularly easily, (the Dinorwig Hydro-plant in Wales notwithstanding), so some energy-intensive industry would need to fit in with this kind of generation.

Man in a Shed said...

The problem is that energy policy has been based on the assumption of secure and cheap gas for the last 15 years.

Much gas will need to be imported from the Algeria, Qatar and Russia in the future. Cheap and secure aren't words that you can associate with sourcing from those places.

The current government has had its head in the sand on energy. I saw a presentation from the coal lobby once and they're main selling point used to be security of supply - the then DTI told them not to darken their door again if they made that argument.

Nuclear makes sense, but will take decades to implement. Till very recently the government was dismantling the remains of our nuclear engineering capability, and selling of the US Westlinghouse (sp?).

We should have been building ten years ago. Labour take most of the blame here- though I don't let the Conservatives of the hock as Alan Duncan played with not supporting Nuclear.

My first political memories are of power cuts. I suspect that the brown outs that impacted the US a few years ago will soon be with us. Its just a matter of time.

The problem is that our politics has been short term, career driven. And like the banks with their staff motivated by bonuses - nobody cared about the long term. They are going to wish they had done so.

I hope your right about the speculation - I find the argument about declining production int he middle east compelling ( these countries are not frank about what is really going on ). Though is Iraq, Brazil and Canadian Oil sands could kick in then perhaps we may get a reprieve.

The most immediate impact of a high oil price may well be Scottish Independence.