Fossil fuels: How the UK made the wrong call

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The underlying assumption of British energy policy for recent years – at least since the disastrous Climate Change Act 2008 – has been that as “Peak Oil” approaches and supplies of fossil fuels are depleted, prices will inevitably rise Even though renewables prices look high today (and remain high if you factor in the costs of intermittency), they would look cheap in ten or twenty years’ time.  Only five MPs in Westminster had the sense and courage to oppose the 2008 Act, and they deserve to be remembered by posterity.  They were Ann Widdecombe, Christopher Chope, Peter Lilley, Philip Davies and Andrew Tyrie.

It seemed a reasonable assumption in the Zeitgeist of the times – after all, were not those green NGOs (most funded by you, through the European Commission) constantly talking about “Peak Oil”?  Was it not obvious that the world’s supplies of fossil fuels were finite, and that even our much vaunted North Sea oil and gas reserves were running down?

No, it transpires, fossil fuels are not running out – or at least not in the sort of timescales that matter to politicians or industries.  Maybe in two hundred years, fossil fuels will be scarce and expensive.  But that’s a bit like a charcoal burner in 1750 worrying whether charcoal would run out by 1950 – and having no way to anticipate Calder Hall.

On Wednesday I attended a lunch-time briefing from a very senior and very well-informed power company executive.  The event took place under Chatham House rules, so (as my old mother used to say) “no names, no pack-drill”.  But it is clear that the world is awash with oil and gas.  For the last thirty years (we heard) new oil discoveries have been coming in at twice the rate of consumption.  New gas discoveries have come in – massive shale gas resources in the USA, gas in the Med basin, and even in the UK if we have the courage to drill.

At the moment, Russia has a quasi-monopoly with its gas pipe to Europe.  But that is not set to last.  More and more LNG is becoming available.  The USA, which long banned oil and gas exports, is now exporting, and LNG terminals are popping up all over the place.  LNG is intrinsically more expensive than piped gas, with the costs of compression/liquefaction at one end, and re-gassing at the other.  But in an amusing twist, some of the LNG re-gassing terminals may not need to be used at all – except as a bargaining counter with the Russians (and other piped gas suppliers).

The Russians can use their quasi-monopoly to demand extortionate prices for their gas – which is, by the way, very cheap indeed to extract.  But if the European buyer can say “I’m not paying that price because LNG is cheaper”, then the Russians have to bring their price down, or lose the business.

There exists an interesting parallel between Russian gas and Saudi oil.  Each is a very low-cost, high volume producer.  Each is now challenged by competition – LNG for gas (as well as Mediterranean and other sources) – and US shale oil for Saudi oil.  Both Russia and Saudi have low cost production, and can afford to compete – though at lower prices and margins than they’re accustomed to.  Each sets a high priority on maintaining market share.  Each will have to reduce prices to maintain volume.

So we may or may not seek to reduce fossil fuel use for other reasons, but we certainly won’t be reducing it (at least not for decades) because of availability and prices.  Terrible news for Greenpeace, but great news for the average motorist.  And the average Western economy.

The other key point to emerge from the briefing was that although through superhuman and vastly expensive efforts the EU is starting to get CO2 emissions under control, it is projected to be down to 8% of global emissions in a few years’ time.  So no further action in the EU will have a significant impact.  Meantime other countries – especially China and India – are building coal capacity as if it were going out of style.  Our speaker seemed to share my view that the Paris COP21 Climate Accord is scarcely worth the paper it’s written on.  Greens will insist that China is prioritising renewables.  It’s certainly investing in renewables, but it’s building coal-fired plants as well, and mitigating the local air pollution effect by putting new coal-powered plants in Mongolia.

One other little aperçu.  We are using a lot of palm oil from Malaysia and Indonesia to make bio-diesel.  It seems that those countries previously used palm-oil for energy production, but in many cases have now turned to coal as they export their palm oil – thus utterly undermining the logic of biofuels.  The European institutions are grappling with Indirect Land Use Change, but have yet to get to grips with indirect substitution of coal for oil.

And the British economy?  We’ve been betrayed by the facile assumption that fossil fuel prices can only go up.  We’re stuck with hugely expensive electricity from renewables (and Hinkley C if it goes ahead), while the rest of the world hones its competitiveness with cheap oil and gas.  And with less than 2% of global emissions coming from the UK, our massive sacrifice will make not a scrap of difference to the climate – even if the alarmists turn out to be right about CO2.