Oil Market Report September, 2014

One of the more interesting paradoxes of the recent Scottish Referendum was the support given to independence by the Green movement. This despite the fact, that an independent Scotland would have been overwhelmingly reliant on oil and gas exploration to fund many of the social programmes proposed by the YES campaign. Undaunted by this reality, the Green lobby was still keen on pushing Scotland’s renewable future in a country where cost effective hydro-electricity already produces up to 25% of local energy needs. Add to that a higher proportion of wind farms than the rest of the UK and a proposed tidal barrage across the Solway Firth and you certainly have the basis for a very credible renewable energy sector.

But in an environment of readily available oil and gas, is it economically desirable or even politically possible for any Government to champion energy sources that in the main are more expensive than traditional methods of power generation? Certainly historically this has not been the case and a common lament of environmentalists is that the abundance of indigenous fossil fuels in the UK has stunted the development of alternative energies. They point to countries like Germany with fewer natural resources than Britain but with a much greater developed renewable energy sector. An example of this would be wind power where Germany generates about five times the amount of electricity from wind farms than does the UK, thus helping them deliver around 10% of its energy from renewable resources. This versus a figure of 2% in the UK!

Let’s face it – that’s a pretty poor show for Team GB, but these comparative figures slightly distort the true picture. Energy in Germany is expensive – much more expensive than in the UK and this is largely because of renewable energy. At the last count, wind power in Germany was costing €0.18 per Kilowatt Hour versus €0.05 – €0.10 when using traditional energy sources (coal, gas, oil). Plus we also shouldn’t get carried away by any German “Greenwash”. Whilst power generation from wind has significantly increased in Germany over the years, so has their use of coal – about 45% of power generation and mostly from lignite (brown coal) which is the most polluting of all fossil fuels. So whilst the legions of wind turbines might look impressive, Germany has actually increased their CO2 emissions faster than any other major economy in Europe (this largely as a result of its nuclear closure programme after the Fukushima crisis).

In Britain wind farms remain disproportionately controversial and it seems unfair to blame the oil and gas industry for the local opposition that is usually forthcoming when wind farms are proposed. Such hostility is usually based on aesthetics but more forensic resistance can also be justified because wind turbines are sadly not particularly efficient. This is because electricity cannot be stored and this in turn means that when the wind doesn’t blow, no electricity can be generated and no reserves can be called upon. Under such circumstances back-up electricity is necessary such is the UK’s requirement for constant electrical supply. Inevitably the only reliable and constantly available back-up power comes from fossil fuel power stations. Worse than that is the fact that switching conventional power stations on and off is both costly and environmentally unfriendly (starting-up the plant requires much more energy than leaving the plant running). So the result is a double whammy for the environment. Not only do you generate CO2 when the wind doesn’t blow (by having to use conventional power stations), but even when it does blow, the back-up power stations have to keep running anyway!

Unfortunately the same problem presents itself with solar power, although it must be said that few countries are less suited to this type of power generation than rainy old Britain. Not to mention the fact that mass solar power requires enormous tracts of unused land – again not one of Britain’s strongest cards! Even tidal energy which on the surface seems so eminently suited to Britain’s island geography has made few in-roads into the UK’s energy infrastructure. This is in truth puzzling, but may well be the result of policy makers looking over the Channel to Brittany’s “La Rance” tidal dam – the world’s biggest tidal power station, built at tremendous cost but still only producing around 0.2% of France’s total energy demand.

None of this means however that we shouldn’t be doing more to generate investment in renewable energy. It makes good sense whether you believe in climate change or simply recognise the fact that the UK’s natural mineral resources are diminishing rapidly. But it does mean that the targets for renewable energy use (20% by 2020) are quite frankly pie in the sky. And whilst Rome burns and CO2 targets are breached left, right and centre, environmental policy makers fiddle. The Greens will never accept it but the only reliable way of reducing CO2 emissions whilst maintaining cheap and constant electricity is to increase the use of gas at the expense of more polluting fossil fuels. This has happened in America and is why a nation of climate change sceptics have successfully reduced CO2 emissions (in some States by up to 40%), whilst the climate change evangelists of Europe continue to increase CO2 emissions through coal-fired power stations. In the UK we are playing our part in this duplicity (40% of energy from coal*). but the choices are becoming increasingly stark. With North Sea gas production heading into sharp decline (70% of gas imported by 2018), a more informed discussion on fracking gas is now surely required. Resistance to fracking may well be even greater than that shown towards wind farms but then again, in the future, opposition to electricity rationing is likely to be greater still…

* imported coal at that – a further obscenity!