ODAC Newsletter - 7 March 2008
Another week, another oil price record. As ODAC went to press, WTI crude was trading around $105, having hit $105.97 on Thursday. That’s a new all-time high, not just in nominal terms but also inflation-adjusted, according to reports this week.
The fact that the inflation-adjusted record set in 1980 has now been broken is interesting because it took a surprisingly long time coming. As recently as June last year, the BP Statistical Review gave the inflation-adjusted peak, established at the outbreak of the Iran-Iraq war, as $90 in today’s money. But as the nominal price has soared in recent months, in press reporting the inflation-adjusted record has risen even faster, retreating like a mirage in the desert, always just out of reach. Until now, that is. To unravel this mystery, this week we have incisive commentary from Bob Wendling of MISI.
As for the reason why the oil price continues to rise, you pay your pundit and take your choice. As usual OPEC blames speculators, and some market watchers blame the weak dollar. No doubt these factors play a part, but more significant would seem to be OPEC’s decision to leave output unchanged, provoking impotent protests from Washington, and rising border tension between Columbia, Ecuador and Venezuela. Between them the three countries produced almost 4 million barrels per day in 2006 (BP Stats).
A research note from stockbrokers Goldman Sachs argues that the oil price rise is being driven by industry cost inflation – which Exxon acknowledged as one reason for its soaring exploration and production budgets and why the oil majors generally continue to struggle. ODAC trustee Jeremy Leggett points out this week that production is falling at all of the super-majors except Total. Elsewhere it was reported that oil discoveries in deepwater Gulf of Mexico have fallen. No wonder the majors are jostling for deals in Iraq.
One of the most interesting articles this week comes from Faith Birol, chief economist of the International Energy Agency. Although the IEA continues to insist that peak oil will not happen before 2030, the Agency does predict a “supply crunch” around 2012-2015, and Birol’s warnings have become increasingly urgent. Last year he told Le Monde that the only thing that could prevent the predicted supply crunch was an “exponential” increase in oil production from Iraq – which still seems highly unlikely, despite improvements in the security situation. This week he argues that we must leave oil before it leaves us, and that “even though we are not yet running out of oil, we are running out of time.”
Perhaps what is running out of time quickest is the IEA’s optimistic long term oil production forecast. It depends in part on oil resource estimates from the United States Geological Survey (USGS) that are arguably over-inflated by about 500 billion barrels. However the IEA is now reviewing its reliance on the USGS data, and this ought to lead to a major downward revision in its forecast when its next World Energy Outlook is published in the autumn.
In the gas market, this week’s deal between Russia and the Ukraine looks more like a ceasefire than an armistice. In coal, the supply crisis has spread to Indonesia, now suffering blackouts despite being the world’s biggest thermal coal exporter, and China plans to reopen 10,000 coal mines that had been closed on safety grounds to cope with fuel shortages.
In the UK, it was a busy week for news on energy policy, but with achingly little progress. The good news is that the government is apparently considering feed-in tariffs – finally! The bad news: only for micro-generation rather than all renewables.
Meanwhile, Gordon Brown revealed a shaky grasp of environmental priorities by bending to the Daily Mail’s campaign against plastic bags and growling at the supermarkets. All well and good, but as the climate hurtles towards tipping points and peak oil bears down – is this really the best use of his time? He might have done better to read Roger Bentley’s comprehensive, three-part demolition of Peter Odell’s recent Guardian piece – which concludes here this week.
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NEW YORK, - Oil hit a record high near $106 on Thursday, fueled by the weak dollar and OPEC's decision to hold crude output steady.
U.S. oil CLc1 settled up 95 cents at $105.47 a barrel after hitting a record $105.97 a barrel during the session. London Brent crude LCOc1 rose 97 cents to settle at $102.61 a barrel, after hitting a record $102.95.
The gains followed a $5 jump on Wednesday, after declining U.S. crude inventories and a decision by the Organization of the Petroleum Exporting Countries to maintain production levels despite consumer-nation calls for more oil.
Speculative buying as investors seek a hedge against inflation and a tumbling dollar also drove oil prices higher.
"The dollar is going down again and hedgers are buying commodities and this is all adding fuel to the fire," said Mark Waggoner, president of Excel Futures.
The dollar extended losses against the euro and the yen on Thursday after U.S. pending home sales were reported unchanged in January, doing little to allay investor worries over the deteriorating U.S. economic outlook.
Wednesday's surge marked oil's single biggest price gain in absolute dollar terms, according to Reuters database EcoWin, although there have been larger daily percentage price gains.
"The crude squeeze continues. The sharp rise in crude was exacerbated by a weak U.S. dollar, OPEC's decision to stand still," Citigroup said in a research note.
OPEC agreed to hold production at current levels on Wednesday, despite calls from the Untied States to increase output to help consumers already battered by the mortgage crisis and the credit crunch.
"We did try to encourage (an increase in OPEC output). But if OPEC has decided they are not going to increase output, there's not a lot that the president can do. We don't control their decisions," White House spokeswoman Dana Perino said on Thursday.
Cartel members insist oil markets are well supplied and blame the surge in prices on speculators and "mismanagement" of the U.S. economy.
A U.S. government report Wednesday showed crude stocks in the world's largest consumer fell by 3.1 million barrels last week, against analysts' forecasts for an increase.[EIA/S]
Distillate inventories, including heating oil, fell 4.8 million barrels, dropping for the fourth consecutive week, as colder weather hit the U.S. Northeast. Gasoline stocks rose for the 17th straight week.
OPEC will next meet in September to assess production levels and evaluate the market, although ministers could confer informally at a conference between consumers and producers in Rome on April 20-22.
Tensions between OPEC member Venezuela, a top oil exporter to the United States, and neighbor Colombia provided further support to the market.
Venezuela deployed forces toward the Colombian border on Wednesday, after a crisis erupted last weekend when Colombia launched a raid against rebels inside OPEC member Ecuador.
Capping a relentless rise in recent years, oil prices hit a record high during the day on Monday, then pulled back to close below the record.
The day’s highest trading price, $103.95 a barrel on the New York Mercantile Exchange, broke the record set in April 1980 during the second oil shock. That price, $39.50 a barrel, equals $103.76 today, when adjusted for inflation.
The surge in energy prices is taking place as investors seek refuge in commodities to offset a slowing economy and a declining dollar. Analysts pointed out that financial institutions like pension funds and hedge funds are also buying oil and other commodities like gold as hedges against a rise in inflation.
That trend is expected to continue, especially after Ben S. Bernanke, the chairman of the Federal Reserve, signaled last week that he was ready to cut interest rates further to bolster economic growth, despite rising consumer prices.
“When investors lose confidence in the central bank, they tend to look for hard assets,” said Philip K. Verleger, an economist and oil expert. “The Fed’s capitulation on inflation is driving investors to commodities.”
For example, Calpers, the California Public Employees’ Retirement System, the largest United States pension fund, said last week that it might increase its commodities investments sixteenfold to $7.2 billion through 2010, to benefit from an across-the-board surge in commodities like gold, silver, oil and wheat.
The latest catalyst for the spike in energy prices has been the recent fall in the value of the dollar, analysts said. Currency traders are selling dollars and buying euros to take advantage of the difference in interest rates between the United States and Europe.
After steep declines last week, the dollar dropped to a record $1.5274 against the euro on Monday before recovering somewhat. It also fell to its lowest level in three years against the Japanese yen.
Like many commodities, oil is priced in dollars on the international market. A falling dollar tends to buoy oil prices in part because consumers using stronger currencies, like the euro or yen, can afford to pay more per barrel.
“The question for oil is, Where is the dollar going?” said Roger Diwan, a managing director at PFC Energy, a consulting firm in Washington. “That’s going to be the main market mover in the short term.”
Since 2000, oil prices have more than quadrupled as strong growth in demand from the United States and Asia outstripped the ability of oil producers to increase their output.
The rising prices of the past decade failed to dent global economic growth as consumers absorbed the higher costs. Even now, with the United States economy slowing markedly, the trend has not slowed much. Global oil consumption is still expected to increase by 1.4 million barrels a day this year, driven by demand in China and the Middle East.
Still, today’s market climate is markedly different from the energy crises of the 1970s and 1980s. These were brought about by sudden interruptions in oil supplies, like the 1973 Arab oil embargo, the Iranian revolution of 1979 or the outbreak of the war between Iran and Iraq in 1980.
Also, the United States’ economy was once much more dependent on oil than it is today. The amount of oil needed to increase economic output by $1 has dropped by 25 percent since 1990.
In the early 1980s, energy accounted for about 8 percent of disposable income in American households. As the economy became less energy-intensive and prices declined, that share fell to under 4 percent in the early 1990s.
But as prices keep rising, the share of energy spending has been increasing. It reached more than 6 percent of household disposable income in December.
Other energy futures also rallied on Monday. Gasoline and heating oil futures both jumped to records. Natural gas prices, which are up 24 percent since the beginning of the year, closed unchanged at $9.346 per thousand cubic feet.
After hitting $103.95 in New York trading on Monday morning, crude oil pulled back to close at $102.45. In London, Brent crude oil futures rose 38 cents, to $100.48 a barrel.
Gold also reached a record after several days of large gains; it traded on Monday at $989.54 an ounce.
With oil setting fresh records, many analysts expect gasoline to approach $4 a gallon on average this summer. Gasoline prices have been rising sharply in recent days and have hit $3.16 a gallon on average, according to AAA, the automobile club. They are closing in on last year’s record of $3.23 a gallon.
There is evidence that these high prices are finally causing consumers to cut consumption.
According to the latest government figures, released Monday by the Energy Department, gasoline demand fell by 1 percent in December 2007 from the previous year. Oil demand was nearly flat last year as well.
Gasoline accounts for about half of the total oil used in the United States, which consumes one in four barrels of oil produced worldwide each day. Most experts say the price of oil is not about to drop anytime soon. Saudi Arabia’s oil minister, Ali al-Naimi, said crude prices were unlikely to fall below $60 a barrel because the cost of developing new supplies, from sources like Canadian tar sands, is rising.
“Therefore, a line has been drawn below which the price cannot fall,” Mr. Naimi said in an interview published over the weekend by Petrostrategies, an industry newsletter in Paris.
Mr. Naimi’s comments came as the OPEC oil cartel prepares to meet on Wednesday. It is expected to leave its production levels unchanged.
The oil producing group suggested last month that it might curb production soon to make up for a seasonal decline in oil demand. But with oil prices at current levels, analysts said members of the Organization of the Petroleum Exporting Countries would find it politically difficult to curb their output now.
Some analysts expect oil producers to trim their production informally to avert an oil surplus in coming weeks. Others say OPEC, which controls 40 percent of the world’s oil exports, is being pulled apart by contradictory pressures.
“The market around the fringes is starting to fray,” said Lawrence J. Goldstein, an economist at the Energy Policy Research Foundation. “Yet ironically, you are looking at triple-digit oil prices because the price is being set by nonphysical investors.”
MISI Occasional Paper on Peak Oil
Many have been questioning the recent press releases warning that oil prices are again approaching or passing the inflation-adjusted high price of "$102.53" (Reuters, 2/28/08).Or was that "$101.70" (Reuters, 10/26/07)? Or, didn’t I just read "$90.46" (BP Statistical Review June 2007)? Confused? You should be.
Let's first clear the air; there is nothing nefarious going on here. It's a matter of the Press creating and marketing news. When it comes to Peak Oil, this actually may be good because it puts the subject back on the front page. In the cases above, all prices are probably calculated using acceptable techniques, but periodicity and timing interfere. First, the prices above reference a daily closing price of some type of crude oil. On that day in April 1980 when Iran and Iraq started their war, how many organizations actually signed oil contracts at those prices? How many organizations actually purchased oil that week? Not many, because oil traded on the world market at an average price that month of $33-$35. As we will see later, that price is actually just over $78 in today’s dollars. The second factor is inflation. Today, while the governments calculate inflation on a monthly, quarterly and annual basis, it is highly likely that inflation is actually rising daily. So, in fact, that daily $103 price cited most recently can be equivalent to the $102 price cited months earlier. It's a moving target, and one can expect to see the "inflation-adusted peak price of oil" increase to $105, then $106, etc. over the coming months.
While this all plays in the Press and the Nightly News, it is not good for energy analysts. Even short-term forecasters don’t like to use data with a period of less than a month. Some of the things we keep in mind when analyzing the long-term price of oil include:
- a well-defined product indicator, like Cushing WTI, with a standard grade (specific gravity and sulphur content), location, and consistent contractual transportation and financial considerations,
- a price periodicity of at least a month or a year,
- an appropriate price deflator.
MISI’s current monthly price series for WTI, displayed in the figure below, shows that since January of 1979, the inflation-adjusted low price of oil reached $14.10 in December of 1998. And, the previous high price of $84.76 in January 1981 was first surpassed in October of 2007 and subsequently exceeded every month since. The new and, no doubt, short-lived inflation-adjusted peak price was set in back in November 2007 at $94.77.
So, let the Press educate the public about the impending day of Peak Oil by creating headlines. However, when it comes to actually working on the Peak Oil problem, we need to stick with the data that affects our world and national economies.
Monthly Price of Cushing WTI Crude Oil, January 1979 – January 2008
U.S. Energy Information Administration, Monthly Energy Review and Petroleum Navigator, 2008; U.S. Bureau of Economic Analysis, National Economic Accounts, 2008; Management Information Services, Inc., 2008.
Bob Wendling is Vice President of Management Information Services, Inc., co-author of the Hirsch report  and the Bezdek report , and former Director of the U.S. Department of Commerce’s economic statistics office, STAT-USA.
Oil prices could double from current record levels to reach $200/barrel by 2011, EU energy commissioner Andris Piebalgs said Tuesday, calling on OPEC to do more to reassure the market about long-term supply potential.
In an interview with Spanish financial daily El Economista, Piebalgs said there was no current shortage of supply on world markets, but that OPEC needed to take more visible steps to show it could increase production going forward.
The EU's top energy official said uncertainty over OPEC's ability to respond to rising world demand for oil was behind the current high prices, which touched a record $103/95/b in New York Monday.
"The markets are very nervous. Prices are going mad because long term guarantees are needed that OPEC has enough resources to respond to the increase in world demand," Piebalgs said in the interview.
"When I arrived at the European Commission in 2004, a barrel of oil cost $52. In three years it has doubled. We cannot exclude that within three years, in 2011, it could be at $200. What I am saying is, partly, a joke. But we should not be surprised."
"We cannot rule out the $200/b because in the last two years we have all been completely wrong in thinking that what is now happening was impossible.
The companies, the International Energy Agency were wrong... When someone said we would get to $80/b, and then they said $100/b, nobody thought they were talking seriously. I remember that Goldman Sachs said it three years ago, everybody took it as a joke," he said.
"The only solution to get out of this situation is for OPEC to develop a predictable and transparent long-term policy of investment and supply."
"I hope that OPEC shows that we are not being left without oil. And that, in the medium and long term, it is capable of increasing its production."
In the short term, OPEC ministers meeting in Vienna this week appear set to leave current production limits unchanged for the time being, saying the current high prices are not due to any fundamental shortage of oil.
In the interview with the newspaper, Piebalgs expressed a similar view, saying OPEC need to tackle long-term concerns rather than any short-term problems.
"A small, timely increase in supply will not change prices because what is true is that right now there is no scarcity in supply and refineries are running at high levels. If everyone is investing in primary materials it is because there is an expectation that prices will keep going up in the long term," he said.
The official suggested OPEC should consider adopting a target range for oil prices again, a policy it followed with some success in the early part of this decade.
Setting a price band again, Piebalgs said, "would show that the organization with the biggest reserves is trying to influence the markets, which would be very useful."
Piebalgs said current high oil prices were "hurting" oil consuming countries. "The consequence could be, depending on the country, weaker economic growth or recession. Which is also unappealing for crude-producing countries."
Washington attacked Opec on Wednesday for its refusal to increase oil production on Wednesday after an unexpected drop in US crude oil inventories pushed prices to a record high.
In a strongly worded criticism, President George W. Bush accused the oil producers’ cartel of damaging the US economy.
Mr Bush said high oil prices were “making it harder here in America for working families to save and for farmers to be prosperous and for small businesses to grow”.
He said he was “disappointed” by Opec’s decision to leave its production limits unchanged in the face of record energy prices. US oil prices on Wedneday jumped $5.04 to a record of $104.56 a barrel.
Opec said in its communiqué on Wednesday that the market was “well-supplied, with current commercial oil stocks standing above their five-year average”.
The cartel also “noted, with concern, that the current price environment does not reflect market fundamentals”.
But Mr Bush said: “It should be obvious to all that demand is outstripping supply and it’s making prices go up.” US crude oil stocks unexpectedly fell last week by 3.1m barrels to 305.4m barrels, nearly 6 per cent below last year’s level.
Francisco Blanch, of Merrill Lynch, said the fall in US inventories highlighted the vulnerability of the supply side.
Chakib Khelil, Opec’s president, blamed the recent rise in oil prices on financial speculation associated with the weakness of the US dollar. “What is happening in the oil market is due the mismanagement of the US economy,” he said.
Investors have been pouring money into commodities, particularly oil, to hedge against the fall of the dollar driven by cuts in US interest rates.
James Crandell, of Lehman Brothers, said: “To the extent that the US economy is weakening, people expect further rate cuts from the Federal Reserve, which pushes oil up even higher. There is a feedback loop that is self-fulfilling.”
However, Samuel Bodman, the US energy secretary, said on Wednesday: “They [Opec] see speculation in the market, I see a decline in global inventories.”
Some hawkish countries such as Algeria and Venezuela, which believe that Opec should soon cut production, had wanted to arrange another cartel meeting next month but moderates led by Saudi Arabia refused.
The decision not to call a meeting ahead of the next scheduled gathering on September 9 signals that most cartel members will allow inventories to rise during the next six months.
The cartel forecast a larger-than-usual increase in inventories in the second quarter of about 1.2m b/d, and a further increase of 0.4m b/d in the third quarter.
David Kirsch, of consultants PFC Energy, said most countries were comfortable leaving Saudi Arabia, the world’s largest producer and Opec leader, to curb its production covertly if demand weakened in the next few months.
The kingdom currently pumps about 9.2m barrels a day, well above its 8.9m b/d official limit, as set by Opec.
The International Energy Agency, the rich countries’ energy watchdog, warned that the world economy “may need more oil before the summer and therefore urge Opec countries to listen to market signals”.
Vienna – Non-OPEC oil producers were unlikely to improve their production over 2008, in a year when the market most needed their output to rise and make an considerable impact, analysts said on Wednesday.
Russia seems to bear the brunt of analysts’ ire. Kevin Norrish, commodities research analyst at Barclays Capital, said, “The latest data from Russia revealed that oil production was at 9.79 million barrels barrel per day (bpd), unchanged from 9.78 million bpd in January and down year-over-year for a second consecutive month.”
Norrish said disappointments were not limited to Russia as the recent flow of data suggests continued positive demand conditions yet parallel non-OPEC supply weakness.
Lehman Brothers forecast that non-OPEC supply was likely to record a growth of only 650,000 bpd or 1.3% in year-over-year terms, and would not do much to alleviate the burden on OPEC crude. Furthermore, 70% of the 650k bpd growth is coming from non-crude liquids such as biofuels, condensates synthetic crude and other conversion supplies, and only 30% from crude oil, according to a note issued by the investment bank.
Lehman believes that FSU growth, expected at 430k bpd, may make a strong contribution, but it merely offsets declines in the North Sea (-280k bpd) and Mexico (-180k bpd).
Deepwater tar sands were seen as crucial, as Brazil is expected to grow production by a further 270k bpd and an additional 170k bpd is expected from Canadian tar sands. Overall, 2008 could be the year for a “last hurrah” for the non-OPEC crude supply, but nothing more, Lehman said.
Looking beyond the figures, analyst Stephen Schork, principal author of The Schork Report, also feels that 2008 could have been a year for non-OPEC oil producers to prove their mettle, but the market must expect nothing more than the usual disappointments.
“To begin, nothing much has changed in Russia. The archaic infrastructure which Russia has is, in any case, detrimental to production. Furthermore, the country’s politics defies belief,” Schork told CEP News.
“In Vladimir Putin, the outgoing president, we have an ex-KGB man using oil as tool. The incoming president would not radically alter Russia’s position; at least we don’t see it happening. End result is that Russia, rather than supporting the oil market, wishes to use it for political gains,” he added.
Schork feels the worst point is that Kremlin’s politics stifle private sector investment into the Russian energy sector, which it badly needs. “End result is Russian oil and gas supplies remain as unreliable as their politics,” he added.
Looking beyond Russia, he felt many other non-members have not stepped up to the plate. “Mexican production has been constantly slipping. As a result, the Saudis and Venezuelans overtook them in terms of export volumes to the U.S. Canada remains at the top of the pile in terms of exports to U.S. but in terms of exporting beyond American shores and opening up inward investment into Canadian Tar sands go, nagging royalty issues predominate. Its Alberta provincial government has committed itself to improving things, but the market is yet to be convinced,” he concluded.
Last year saw the least oil and gas reserves discovered in the deep-water US Gulf of Mexico in a decade, according to a study released by Wood Mackenzie.
Wood Mackenzie said in contrast to the successes of 2006, deep-water exploration in the US Gulf of Mexico during 2007 was relatively disappointing.
The study defines deep water as anything deeper than 400 metres.
The report said reserves found in the deep US Gulf last year totaled 553 million barrels of oil equivalent, less than half the reserves found in an unusually strong 2006 and the least in 10 years.
According to a Reuters report on the study, the lower level of exploration activity during 2007 is in part due to higher levels of appraisal and development drilling activity coupled with the tight rig market.
Thirty-four exploration wells were drilled in the deep US Gulf in 2007, down from the annual average of 43, but in line with 2005 and 2006 performance, Wood MacKenzie said.
Forty-one percent of wells were successful, down from the average of 44%, the report said.
Of deepwater reserves found in 2007, 229 MMboe have been deemed commercial, or 41% of the total, down from the long-term average of 43%.
Average drilling time was 71 days, substantially below the 108-day average in 2006 but in line with the long-term average and 2007 wells were generally shallower than those targeted in 2006.
ExxonMobil, the world's biggest oil company, is set to increase capital spending by at least 20 per cent as escalating labour and equipment costs push up the costs of projects.
The US group is planning to spend more than $125bn over the next five years, compared with $90bn over the previous five-year period, due to a combination of higher costs and the development of new projects.
"The costs are a significant challenge for the industry as a whole, and they're a challenge for us as well,'' said Rex Tillerson, Exxon's chairman and chief executive, at the company's annual meeting yesterday.
Labour and equipment costs have risen dramatically in recent years amid a ramping up of projects to meet world energy demand. Mr Tillerson said the shortage of skilled labour and equipment was putting pressure on the industry's ability to complete projects in the desired time frame.
Separately, Mr Tillerson said the company planned to almost double its production of liquefied natural gas (LNG) over the next three years. Gas accounts for half of Exxon's reserves base.
The jump in LNG production comes as Exxon starts multiple projects across the LNG business, including production, transportation and distribution.
The world's largest oil companies have been increasing their gas projects in recent years as state-owned energy companies in countries such as Venezuela and Russia increasingly block foreigners from new oil projects, having acquired the skills to develop them for themselves.
However, state-owned oil companies are still seeking out international oil companies, such as Exxon, to help develop gas reserves because of the specialised technology and management skills required on such massive projects, according to a recent report from consultants PFC Energy.
Big oil companies also offer access to markets as well as reassurance to bankers funding projects, which often cost between $10bn- $20bn, and their access to markets.
Exxon said its business remained robust, boasting reserves replacement in 2007 of 101 per cent, as it added 1.6bn oil equivalent barrels of proved reserves.
It stressed the company had a "very deep inventory'' of resources to develop in coming years spread throughout the world and derived from a variety of sources, including Canada's oil sands to the deepwater Gulf of Mexico.
From 2008 to 2010, Mr Tillerson said the company expected to participate in the start-up of 19 projects, which, at peak, would collectively add more than 725,000 oil equivalent barrels per day to Exxon's production.
Mr Tillerson said Exxon's return on capital of 32 per cent in 2007 was almost 40 per cent greater than its closest competitor, and increased its five-year average to 28 per cent.
LONDON -(Dow Jones)- OPEC's oil ministers may blame speculators for driving oil prices into record territory but Goldman Sachs (GS), whose S&P GSCI Commodity Index is the world's largest, said Tuesday that fundamentals, not speculators, underpin scorching crude prices.
Analysts at the investment bank said in a report that talk of speculative money as the primary reason for whipping oil prices to a record high of almost $ 104 a barrel in New York Monday is overstated, with its long-term price of $85 a barrel rooted in energy project cost inflation and low spare capacity.
The April 2013 oil futures contract on the New York Mercantile Exchange traded at $98.45 a barrel late Tuesday and Goldman Sachs said its long-term forecast was more likely to rise than fall.
"We maintain that the recent oil price rally has been largely fundamentally driven and that the fund buying is more likely the result of rising prices rather than the primary cause," the bank said.
Many analysts and oil traders - and almost every minister from the 13-member oil-producing cartel the Organization of Petroleum Exporting Countries - have attributed the run-up in oil prices in recent weeks to funds hunting for a home to protect against inflation or fleet-footed hedge funds exploiting the twists and turns of the volatile oil market.
"The recent rally has been driven by the same long-term structural supply issues which have driven the energy price rally of the past decade, not investor buying," Goldman Sachs said.
"Escalating industry costs and the need to further motivate new investment in an industry that has largely exhausted spare production capacity continue to be the main driver of oil prices."
Funds, it continued, have played only a modest role in the price surge. Open interest in oil futures is below levels seen a year ago and net speculative length in the futures market isn't markedly higher than last summer, when prices were $30 a barrel lower than now.
Further proof it cited is that physical crude prices remain high, showing " prices have not disconnected from the underlying fundamentals."
OPEC's de facto leader, Saudi Arabia's Oil Minister Ali Naimi, said in an interview published at the weekend that "hedge funds, retirement funds, pension funds and so forth, seize any opportunity to make money and that's what they are doing...but it is driving the price, it is creating a paper demand and influencing the price."
Global oil demand, he continued, doesn't account for the whole oil price.
"Is it 60%, is it 70%. It would be purely a guess on my part. But there is definitely a piece of that price that is influenced by the activities of hedge funds or geopolitics...that's a fact."
The S&P GSCI Commodity Index is the world's largest commodity index fund with assets of $80-$85 billion of assets benchmarked to it by the end of last year.
Iraq hopes to sign tecnical support contracts with a handful of oil explorers in March.
Iraqi Oil Minister Hussain al-Shahristani said negotiations are at the end with companies including Shell, BP, ExxonMobil, Total and Chevron.
"They will study the fields with us, we will put together a plan to boost production, they will help us to select the equipment and deliver this equipment to us. There are other firms which showed interest in signing with us, so we might as well sign a few more as we go along," Shahristani said.
According to Reuters, the contracts are expected to add 500,000 barrels per day of oil to Iraq's output in a year.
This week, oil reached its highest price ever, exceeding the inflation-adjusted record of $103.76 set in April 1980, at the height of the second oil shock. Then, the world was worried that the high price would trigger a global depression. Now, the scope for the oil price to soar ruinously higher than $100 does not seem to worry many people. The landmark record did not reach the front pages.
Yet developments in the peak oil debate so far this year should be sounding alarm bells everywhere. In the first week, with the oil price hitting three digits for the first time and growing numbers of oil traders betting on forward contracts for $200 oil before the end of the year, the James Baker Institute urged oil industry bosses to address falling investment in exploration. The institute was worried because the big five international oil companies had cut exploration spending in real terms between 1998 and 2006, notwithstanding the rise in oil prices and the increasingly desperate need to find more.
In the second week, Total boss Christophe de Margerie warned that oil production may be nearing its peak. He now believes the world will never be able lift production from the current level of 85m barrels per day. One hundred is out of the question, he says, much less the 115m that so many optimists assume. The CEO of ConocoPhillips agrees with him. The oil companies duly announced their 2007 results, and masked in statistics combining oil and gas production was the alarming fact that all, bar Total, had suffered falling oil production. This is not what we expect of an oil-addicted world on course for 115m barrels a day.
The CEO of Hess was the next oil boss to blow a whistle, telling an oil industry conference in Houston that oil companies, oil-producing countries, and consumers need to act now. "Given the long lead times of at least 5-10 years from discovery to production," he said, "an oil crisis is coming and sooner than most people think. Unfortunately, we are behaving in ways that suggest we do not know there is a serious problem."
Sixty per cent of the world's oil production is from countries that have already peaked. As for the tar sands, said John Hess, "their contributions to supply are not material enough to bridge the gap in oil requirements over the next 10 years."
The IEA have been warning during 2007 that non-OPEC oil will peak within a few years, and even making it that far depends on Russia expanding production. But last week in Moscow, a Russian senator voiced doubts that Russia can meet commitments to the west in both oil and gas. Senator Gennady Olenik, an ex-oilman, told a news conference that private companies have not been prospecting in the oil-and-gas rich north since being created in the early 1990s. A former Soviet Minister of Geology, Yevgeny Kozlovsky, backed this up.
In other words, as RIA Novosti put it, "for the last 15 years, Russia has done practically nothing to reproduce its mineral wealth, but has been scattering the inheritance it received from the previous generations. In this context, reports about an imminent reduction in oil production in Russia are a source of concern. We have been giving promises to Europeans, Chinese and other foreign partners, but will we be able to keep them?"
Herein lies the biggest fear of all. If peak oil hits, and the slumbering industry awakens from its endemic over-optimism - in the west and in producing countries alike - what do we do if the producers start keeping their fast-dwindling resources in order to power up their own fast-expanding economies? An oil shock then risks turning into an energy famine.
We are on the brink of a new energy order. Over the next few decades, our reserves of oil will start to run out and it is imperative that governments in both producing and consuming nations prepare now for that time. We should not cling to crude down to the last drop – we should leave oil before it leaves us. That means new approaches must be found soon.
Even now, we are seeing a shift in the balance of power away from publicly listed international oil companies. In areas such as the North Sea and the Gulf of Mexico, production is in decline. Mergers and acquisitions will allow "big oil" to replenish reserves for a while,and new technologies will let them stretch the lives of existing fields and dip into marginal and hard-to-reach pools. But this will not change the underlying problem. Oil production by public companies is reaching its peak. They will have to find new ways to conduct business.
Increasingly, output levels will be set by a very few countries in the Middle East. This does not necessarily mean an immediate return to the price shocks of the 1970s, because producing countries have learnt that stability is in their interests. Even so, it is not certain that they are ready to increase production to meet growing world demand. Building new capacity takes time.
On the demand side, we see two big transformations. Wherever possible, people have already switched from oil, particularly for industrial use, home heating and electricity generation. In future, oil will mainly be used in the transport sector, where we have no readily available alternatives.
The other transformation is that the bulk of demand growth is coming, and will come in the future, from China and India. Here again, car ownership is the main driver. By 2020, India will be the world's third-largest oil importer, and we expect China will be importing 13 million barrels in 2030, which means another US in the market. In terms of car sales, we estimate that by 2015 at the latest, more cars will be sold in China than in the US.
What will all this mean for the price of petrol? The indications are that if the producers don't bring a lot of oil to the markets, we may see very high prices – perhaps oil at $150 a barrel by 2030. If the governments do not act quickly, the wheels may fall off even sooner.
The developed, oil-consuming countries can do several things to ease the transition to the new energy order. One would be to boost vehicle efficiency. Another would be to make better use of biofuels, although to be helpful, these need to be produced cheaply in developing countries like Brazil, not by heavily subsidised farmers in the developed world.
High prices also make it profitable to produce fuel from unconventional sources such as tar sands. But to do this requires plenty of energy, mostly from natural gas, and the process emits lots of CO2. Tar sands are attractive, but like biofuels, they will never replace Middle East oil.
In the long term, we must come up with an alternative form of transport, possibly electric cars, with the electricity being provided by nuclear power stations. The really important thing is that even though we are not yet running out of oil, we are running out of time.
Vladimir Putin, the outgoing president of Russia, stepped in yesterday to defuse a crisis that threatened to slash gas supplies to Europe after Gazprom, the state-owned oil giant, cut the flow to the Ukraine.
European politicians were breathing a sigh of relief after the row, which erupted after Gazprom cut supplies to Ukraine by 50 per cent this week over the latter's non-payment of a $600m bill, was resolved. Following a phone call between Mr Putin and the Ukrainian president, Viktor Yushchenko, Gazprom and state-owned Naftogaz Ukrainy issued a joint release stating that they had "reached an agreement which resolves the gas payment issue". They added that "the transit of Russian gas across the territory of Ukraine for the European customers remains in full". Terms of the settlement were unclear, and the companies said that other issues on the contentious gas delivery regime between the two countries "will be continued".
About 80 per cent of the gas that flows from Russia to Europe passes through Ukraine. European ministers yesterday called for an emergency meeting after Naftogaz had said earlier in the day that it would hoard about 60 million cubic feet of gas, about a fifth of the flow to Europe.
The political damage that would have been wrought by cutting Europe's gas was enough to prompt Mr Putin and Mr Yushchenko to hammer out a swift solution.
The episode will none the less focus the minds of politicians and industry leaders increasingly worried about the heavy dependence on Russian gas. "This has shown us again a problem that we already know about," said Katinka Barysch of the Centre for European Reform. "It could be seen as reassuring that every time Ukrainians have a problem with the Russians, Hungary and Italy won't feel the pain."
The conflict centres on a disagreement over how much of the gas Ukraine has received since the beginning of the year has come from Russia, and how much of it originated in Turkmenistan. Turkmen gas is much cheaper than Russia's. Ukraine has argued that it has received mostly Turkmen gas and is thus being overcharged by Gazprom. Russia has unsurprisingly argued that it has supplied the majority, and thus should be paid accordingly.
The other point of contention is RosUkrEnergo, an opaque trading group owned by Gazprom and a pair of businessmen that makes huge profits on the sale of Gazprom's gas to Ukraine. Prime minister Yuliya Tymoshenko has called for the elimination of its involvement in the country's gas supply.
One winner from the row could be Gerhard Schröder. The former German prime minister is the head of Nord Stream, the pipeline project that would bypass Ukraine and instead be built through to the Baltic coast in Germany, into the Netherlands and ultimately to the UK. Mired in a swamp of political and regulatory issues, a fresh supply scare could be just what the project needs to get moving. The case for South Stream, another proposed pipeline that would run from Russia through the Balkans to Italy, could also get a boost.
A senior Chinese delegation is expected in Tehran soon to sign an agreement for a $16 billion investment to develop an Iranian gas field and build an LNG plant, an Iranian source said Wednesday.
The contract had been due to be signed on February 27 in Tehran but the signing ceremony was postponed at the last minute without any explanation from either of the two parties--China's state-owned National Offshore Oil Corporation and the Iranian Pars Oil and Gas Company.
The source said the delay was because the Chinese delegation wanted to wait until after the UN Security Council had voted on new economic sanctions against Iran and send a more senior delegation to the signing ceremony.
There had been speculation that the deal had been struck but that the Chinese side had been reluctant to make it public because of sensitivities over Iran's nuclear program, which this week led to the imposition of tighter UN sanctions against Tehran.
"They are expected in Iran very soon," said the source, speaking on the sidelines of the OPEC meeting in Vienna. "They wanted to come at more senior level for the signing."
Under the agreement, which will represent one of the biggest single foreign investment in Iran's energy sector, CNOOC will develop the North Pars gas field under a so-called buyback agreement devised by Iran to bypass a constitutional ban on production-sharing agreements.
The field, the northern part of the giant offshore South Pars field, the world's single biggest concentration of unassociated natural gas, is scheduled to be developed in four phases and gas produced will be allocated to a planned LNG plant at the southern port of Assaluyeh on the Persian Gulf.
The upstream phase of the project is estimated to cost $5 billion and the downstream $11 billion.
The state-run National Iranian Oil Company, POGC's parent company, will take half of the LNG produced and the rest will go to the Chinese company.
NIOC and CNOOC signed a memorandum of understanding in December 2006 for the development of the field and a gas purchase agreement whereby CNOOC would buy 10 million mt/yr of the LNG produced for 25 years.
Iran has the world's second biggest natural gas reserves after Russia but it has failed to develop them and establish itself as a major gas exporter, partly because of high domestic consumption and the OPEC oil producer's need for massive injection of natural gas to maintain pressure in its aging oilfields.
UN sanctions and unilateral US sanctions which penalize investors in Iran's energy sector have also been deterrents to foreign investment by Western oil and gas firms.
BEIJING - CHINA will allow more than 10,000 coal mines that were closed amid a safety drive to reopen due to an energy shortage caused by the recent winter weather crisis, state press said on Thursday.
'Due to the winter weather disaster and lengthy (Lunar New Year) holiday break in mine output, the pressure on coal production ability has been great,' the Beijing News quoted national work safety chief Li Yizhong as saying.
'For the time being, the State Administration of Work Safety... will allow more than 10,000 closed coal mines to resume production under stiffened inspection standards,' said Mr Li, who heads the administration.
China has in recent years attempted to close thousands of unsafe and illegal coal mines in an effort to stem the horrific number of accidents that claim roughly 10 lives a day on average.
Nearly 3,800 lives were lost in the coal mines last year, according to official figures, but independent labour groups say the real toll is much higher as many accidents are covered up to prevent shutdowns and legal action.
The government claimed to have closed thousands of mines in its safety campaign.
Top officials acknowledged that the drive was at least partly responsible for dwindling national coal stocks that worsened into an energy crisis when a historic winter weather front hit large swathes of the country in January.
Freezing weather caused nationwide transport havoc just as an estimated 180 million people tried to embark on annual trips home for the Chinese Lunar New Year holiday in early February.
The transportation woes temporarily squeezed distribution of coal, which supplies about 70 per cent of China's energy needs, driving national stockpiles down to perilously low levels, according to past reports in the state-run press.
Mr Li, who spoke on the sidelines of the two-week National People's Congress, which opened on Wednesday, did not say how long the reopened mines would be allowed to stay in production, according to the Beijing News report.
For weeks, South Africa has suffered rolling blackouts caused in part by a shortage of coal. Gripped by unusually bitter snowstorms, China recently banned coal exports for the next two months. And at Newcastle, Australia, the world's largest coal export terminal in the world's largest coal exporting country, the queue of carriers waiting to load has been known to stretch almost to Sydney, 150km to the south.
Coal, for so long the Cinderella of fossil fuels, is suddenly not just in demand but in desperately short supply. The world's biggest producers and exporters are struggling, and the price of imports to Europe has doubled to almost $140 (£70.5) per tonne over the past year. "It's a global crunch," says John Howland, managing editor of the international coal industry magazine McCloskey's Coal Report.
The immediate reasons for the price spike are soaring demand, inadequate infrastructure and bad weather. But now there are also gnawing doubts that global coal production may, within the next few decades, face fundamental geological constraints, or "peak coal".
Ask most energy analysts how much coal we have left, and the answer will be a variant on "plenty". The latest "official" statistics from the World Energy Council put global coal reserves at the end of 2006 at a staggering 847bn tonnes. Since world coal production that year was just under 6bn tonnes, the reserves-to-production (R/P) ratio - the theoretical number of years the reserves would last at the current rate of consumption - is well over 100 years.
It is commonly assumed, therefore, that there can be no shortage of coal this century. However, a clutch of recent reports suggest that coal reserves may be hugely inflated - a possibility that has profound implications for global energy supply and climate change.
A report published last year by the EU Institute of Energy pointed out that as demand for coal has soared since the turn of the century - with China famously opening one coal-fired power station per week - the world's reserves have fallen fast. The authors calculated that the R/P ratio had dropped by almost a third, from 277 years in 2000 to just 155 in 2005.
Mysteriously, this fall happened despite a sharp rise in the price of coal, which traditional economic theory suggests should increase the level of reserves by making it possible to exploit more marginal deposits. The report warned that "the world could run out of economically recoverable (at current economic and operating conditions) reserves of coal much earlier than widely anticipated". When the latest data, from 2006, was published last year, the R/P ratio had dropped again to just 144 years.
Energy Watch, a group of scientists led by the German renewable energy consultancy Ludwig Bölkow Systemtechnik, has drawn an even more alarming conclusion. In a report also published last year, the group argues that official coal reserves are likely to be biased on the high side. "As scientists, we were surprised to find that so-called proven reserves were anything but proven," says the report's lead author Werner Zittel. "It is a clear sign that something is seriously wrong."
Energy Watch found that many countries' reserves figures had remained suspiciously unchanged for decades - China's since 1992, despite having mined 20% in the intervening years. But in those countries that had revised their figures, the changes were overwhelmingly negative. For instance Britain, Germany and Botswana had cut their reserves by over 90%, more than could be accounted for by mining alone, suggesting these gloomier updates were based on improved data.
As a result, Energy Watch concluded the current reserves figures are likely to represent the upper limit of available coal, meaning that production will stall far sooner than expected. On the basis of a country-by-country analysis, the group forecasts that although global coal output could rise by about 30% over the next decade, it will peak as early as 2025 and then fall into terminal decline.
Less coal, of course, means less carbon, and a recent analysis by Dave Rutledge, chair of the department of engineering and applied science at the California Institute of Technology, suggests that current forecasts of man-made CO2 emissions may be far too pessimistic. By analysing the coal production trends in individual countries, using an ingenious technique called Hubbert linearisation, Rutledge's estimate of the total amount of coal that remains to be produced is much lower than the official figures.
Using historical examples such as Britain, where coal output peaked in 1913 and mining is now all but finished, he can demonstrate that the approach is far more accurate than traditional explanations. By this method, the predicted future global coal production will amount to around 450bn tonnes before mining stops - little more than half the current official reserves figure.
The effect on the emissions outlook is dramatic, producing a peak atmospheric CO2 concentration in 2070 of just 460ppm (parts per million) - fractionally above the 450ppm that many scientists believe is the threshold for runaway climate change, and lower than even the most optimistic of the 40 climate scenarios by the Intergovernmental Panel on Climate Change (IPCC). "In some sense, this is good news," Rutledge says. "We are likely to hit 450ppm without any policy intervention." Therefore, even if governments did nothing, total CO2 concentration would not surpass the presumed climate change threshold by much.
Neither Energy Watch nor Rutledge could remotely be described as climate-change deniers - quite the opposite - but their findings worry many climate scientists, including Pushker Kharecha, at the Nasa Goddard Institute for Space Studies in New York. He agrees that coal reserves are probably overstated, but insists that curtailment of coal emissions is still essential to combat climate change. "What are the risks if the low-coal people are wrong?" he asks. To pin our hopes on low coal would be dangerously complacent, he argues, because if it is only marginally wrong the additional emissions could ensure catastrophe.
Rutledge agrees that although his analysis suggests that the fossil fuel reserves assumed in the IPCC model are far too high, it does not mean the problem of climate change is solved. Recent evidence suggests that the climate is more sensitive to carbon emissions than previously thought, and the IPCC model does not yet take account of long-term "positive feedback loops", such as the melting Siberian permafrost or shrinking icecaps, which will accelerate global warming. Jim Hansen, director of the Goddard Institute, has warned that the danger threshold for CO2 is probably much lower than 450ppm.
What it does mean, however, is that the world's looming energy crisis could be even more severe than anyone imagines. In the International Energy Agency's latest long-term forecast, global coal consumption needs to rise 60% by 2030 to satisfy economic growth, and coal-fired electricity generating capacity has to double. But if Zittel and Rutledge are right, there is little chance of those predictions being fulfilled. And as global oil production goes into terminal decline within the next decade or so, there is even less chance that synthetic coal-to-liquids fuels can make up the crude deficit.
But the good news is that the imperatives of climate change and peak oil are identical. "In the long run, economies that rely on depletable resources are doomed to fail," Zittel warns. "The coal peak makes it even more urgent to switch to renewable energy without delay."
As the number one thermal coal exporter in the world, Indonesia should not be facing a coal crisis.
Oil prices have been rising steadily for the last five years, from US$31 per barrel in 2003 to $102 per barrel today.
There has been a recent hike in oil prices rising 67 percent from $61 per barrel in early 2007 to a record high of $103 per barrel. This follows the weakening rupiah, winter in the northern hemisphere, strong oil demand and political instability in the Middle East.
The Energy Information Administration (EIA) is optimistic oil prices will start to ease from April until 2009 as America's economy is expected to slow down, winter ends and crude oil reserves increase.
The EIA is estimating an average West Texas Intermediate oil price of $87 per barrel this year and $82 per barrel in 2009.
Prices for oil substitutes, especially coal, are also increasing.
Newcastle coal prices have risen 45 percent in the past two months, from $91 per ton in January to $132 per ton today, and are expected to hover around this price.
In response, Indonesia has almost doubled production in the last five years from 113 million tons in 2003 to more than 210 million tons last year, with about 75 percent exported.
At this production level the country has become the largest thermal coal exporter in the world.
Ironically, recent reports suggest that PT PLN, the state electricity company, has been experiencing coal shortages in the Java-Bali area. This recently resulted in a 1,000MW power deficit with the company operating at 4.7 percent below capacity.
In response to the shortage, PLN cut off electricity supplies in a number of areas throughout Java and Bali. As the world's largest thermal coal exporter, Indonesia was ironically unable to secure coal supply for domestic use.
Bad weather and a lack of transportation were blamed for the incident. The wet season is inevitable and such problems should be anticipated.
The Transportation Ministry claimed there was no coordination between PLN and the relevant ministry to overcome the problem.
Surprisingly, some coal-generated power stations have less than a week of coal inventory, while normally they should have about two weeks or more of fuel stocks.
With minimal coal stocks on site, bad weather means the country's electricity supply is at stake. A long-term plan to have fuel-supplied power stations needs to be established if the company is to tackle the problem.
The country has one of the largest coal mining areas in the world with reserves available to supply PLN's coal needs for the next 30 years, even after accounting for the completion of the much needed 10,000MW power plant project.
If PLN had a long-term coal off-take contract, its coal problem would be solved.
Today's rising coal prices lead to coal companies exporting their products, making it harder for PLN to secure its supply if it has to buy it at market price.
PLN is the sole electricity company in Indonesia. As electricity is essential to the country's security and development, the government needs to support its sustainability.
It must create disincentives for those who waste electricity and give PLN the subsidies it needs so that the number one thermal coal exporter in the world does not face anymore electricity outages.
The writer is a reseacher at PT Bahana Securities
In a shock move, German energy giant EON has said it will sell its power grid in order to end a major antitrust investigation by the European Commission. The EU hopes other power companies will follow EON's lead.
The EU's executive body said on Thursday, Feb. 28, that it would check whether the move by EON will end the company's antitrust problems. The European Commission has been trying for years to push energy companies to divest their grids in order to increase competition in the electricity and gas market and make prices more consumer-friendly.
EU leaders agreed last year to separate power production from distribution networks. The commission favors complete "ownership unbundling" or having an independent company to run pipelines and energy grids, but a group of eight countries, led by France and Germany, was pursuing an alternative to avoid the break-up of their vertically integrated utilities.
EON's announcement on Thursday came as a complete turnaround.
"EON proposes to commit to sell its electricity transmission system network to an operator which would have no interest in the electricity generation and/or supply business," the European Commission said in a statement.
Move could end antitrust inquiry
EU economics ministers were meeting in Brussels on Thursday to discuss ways of increasing competition in the gas and power sector. EU Energy Commissioner Andris Pielbalgs welcomed EON's decision, adding that he hoped other companies would act in a similar fashion.
Wulf Bernotat, chief executive of EON, had discussed the possible sale with German Chancellor Angela Merkel, a government spokesperson said. Still, the news is likely to have come as a surprise, as the German government had made a point of lobbying in Brussels for the company to avoid such a sell-off.
The company has also promised to divest 4,800 megawatts of generation capacity to rivals. Brussels said it would ask EON's customers and competitors for their views on the proposal, and would close the antitrust cases once a legally binding decision was made.
EU aims to lower prices
The EU's investigations concerned problems in the power sector where, according to Brussels, former state-run monopolies had too much control over the supply chain, keeping prices high and limiting much-needed investment to expand capacity.
"We have been aware for some time that EON but also RWE and Vattenfall are in close touch with investment banks to sell their grids," Claude Turmes, a member of the European Parliament's energy committee for the Greens group, told Reuters. "This is a tipping point in the debate."
RWE, Germany's second-largest utility, said it was not going to sell its grid.
A spokesman for Vattenfall Europe, a Swedish-based company that is vertically integrated in Germany, confirmed that it was looking at alternative ownership structures for its German transmission network.
The UK’s reliance on nuclear power will increase “significantly” over the next two decades, the business secretary said on Wednesday as he set out an expansive vision of the country’s atomic future.
John Hutton told the Financial Times he expected the new generation of nuclear power stations the government wants to see built to supply much more of the country’s electricity than the 19 per cent the existing ones deliver.
Mr Hutton also dropped the government’s previous commitment to maintaining a minimum 29.9 per cent stake in British Energy, the nuclear generator.
Ministers have refused to be drawn on the scale of investment in new nuclear reactors they hope to attract to the UK, saying it is for the market to decide.
But Mr Hutton made it clear that the government would pull out all the stops to maximise the expansion of nuclear power.
“We need the maximum contribution from nuclear sources in the next 10 to 15 years,” Mr Hutton said. Asked if the government wanted the share of electricity generated from nuclear to increase beyond 19 per cent, he replied: “That’s the ambition we should have ... I’d be very disappointed if it’s not significantly above the current level.”
Replacing the UK’s ageing stock of reactors is seen as vital to achieving the government’s targets on cutting carbon emissions and reducing dependence on imported gas.
After nearly a decade of indecision over the move to support a new generation of nuclear reactors, the government is now determined to fast-track the replacement of the 10 stations, all but one of which is due to close by 2023. The first plant could be operational by 2017, a year ahead of the target set in a white paper in January, Mr Hutton said.
“If we can accelerate the time-scale, we should,” he said. “We’ve got to be completely serious about this ... we should keep our foot down on the pedal.”
The government may sell its £2bn-plus stake in British Energy, Mr Hutton suggested, with a decision “in the next few years”. Ministers have previously said they will not sell down the state’s 39 per cent stake in Britain’s biggest electricity producer below 29.9 per cent.
“We have to consider for the medium term what view we should take about holding on to these shares,” Mr Hutton said. The government was “clear that we don’t want the taxpayers to be involved in new nuclear investment”.
According to Mr Hutton, investors are queuing up for the multi-billion pound construction programme, on the proviso that the government meets its commitment to “clear the decks” of regulatory obstacles.
“We’re in exactly the right place, I’ve been very encouraged by the reaction [from investors],” he said. “It’s completely confounded all those people who said ‘it’s not going to happen’ – it’s going to happen and in a shorter time- scale than our critics predicted.”
A nuclear plant built at a cost of £470m to provide atomic fuel to be used in foreign power stations has produced almost nothing since it was opened six years ago, the government has admitted.
The mixed oxide (Mox) facility at Sellafield in Cumbria - which was opposed by green groups as uneconomic - was originally predicted to have an annual throughput of 120 tonnes of fuel.
The energy minister, Malcolm Wicks, has admitted in response to a parliamentary question that it had managed only 2.6 tonnes in any one 12-month period between 2002 and 2006-07.
In the four years before 2002, the plant had produced annual figures respectively of 2.3 tonnes, 0.3 tonnes, 0 tonnes and 0 tonnes.
The technical difficulties at the facility and the failure to get anywhere close to its financial targets will add to concerns about the economics of nuclear power, following the government's decision to give the green light to a new generation of atomic reactors.
Wicks described the Sellafield Mox plant (SMP) as being based on "largely unproven technology" and pointed out that its estimated annual output had been reduced by 2001 to 72m tonnes.
British Nuclear Group (BNG), which operates the Sellafield site, said a range of improvements were being made to the facility but it admitted that the 2007-08 period had again seen production disrupted by various problems.
The SMP was designed to make new fuel from the recycled uranium and plutonium recovered from used nuclear fuel, which had been reprocessed by the nearby thermal oxide reprocessing plant (Thorp) at Sellafield. A Mox demonstration complex was opened in 1998 but was hit by a scandal involving quality control and the falsification of documents, which led to the resignation of John Taylor, chief executive of BNFL.
Attempts to open the main SMP facility led to high court challenges by Greenpeace and Friends of the Earth, which argued that the government's decision to allow BNG's parent group, BNFL, to proceed with opening the facility was unlawful under European law. The Irish government also took unsuccessful legal action to stop the SMP opening over concerns about radioactive effluent from the plant polluting the Irish Sea.
Jean McSorley, a nuclear campaigner at Greenpeace, said the Mox plant was - along with Thorp - "another great failure of British nuclear engineering" and pointed to the dangers of accepting the industry's economic models and promises. She pointed out that Thorp had been shut for the past three years because of an accident and continual attempts to reopen it had been thwarted by further problems.
A spokeswoman for BNG, the operating division of BNFL, said production was still being "ramped up" and the performance of the plant was the subject of a detailed improvement plan. She said the problems at the SMP were not related to the difficulties at Thorp.
"We had to overcome a number of technical issues and make engineering improvements to the [SMP] plant as part of the normal commissioning process. We made improvements to plant maintenance, equipment reliability and have installed upgraded equipment as required," she said.
"We are awaiting suitable plant availability to demonstrate the benefits of these capacity enhancements. Throughput in 2007-08 was adversely affected by the extended outage for the fuel campaign change. We remain committed to meeting our customers' Mox fuel requirements."
BNG has been forced to meet the needs of Swiss and other contracted customers for Mox fuel through buying alternative supplies from France and Belgium.
With the £470m construction costs written off, the plant was assessed by government-appointed consultants in 2001 to have a net positive value of only £216m - a value that was partly based on winning back Japanese business, which proved hard after the falsification of quality-assurance data in 1999.
If we use sewage, refuse or agricultural waste, biofuels can be sustainable - and cut poverty, says Ron Oxburgh
George Monbiot has gone too far. Whatever sympathy one has with his campaign against some present-day biofuels, it is absurd to say none are sustainable (Apart from used chip fat, there is no such thing as a sustainable biofuel, February 12).
A month ago the Royal Society published a thoughtful paper, Sustainable Biofuel: Prospects and Challenges, which concluded that, done carefully, biofuels could reduce greenhouse gas emissions from transport. There certainly are sustainable biofuels, and producing some of them can help alleviate poverty in developing countries.
Monbiot seems to assume that biofuels can be produced only from crops that are planted for the purpose. This is far from the truth. We shall be increasingly dependent on what we grow not only for food but also for fuel, and for raw materials for industrial processes. This will mean that the whole plant is used, with different parts meeting different needs, and the term "agricultural waste" will disappear from our vocabulary - in effect a return to the more integrated agricultural production of earlier centuries.
In so far as he might argue that we are not there yet, Monbiot would be right. He states: "When land clearance ... is taken into account, all the major biofuels cause a massive increase in emissions." If a crop is grown solely as a fuel and on agricultural land displacing food production, or is cultivated in such a way that the emissions from producing it are greater than those of the fossil fuel, it is clearly a nonsense. Perverse US agricultural subsidies promote this today. But this is not the only route.
Biofuels can be made from anything that grows or was produced from something that grew. Some "agri-wastes" (eg straw) can be converted to the petrol substitute ethanol. Probably the largest untapped source of bioenergy is the organic content of urban and industrial refuse and sewage. Obviously as much as possible should be recycled, but - although it is not easy, as Monbiot points out - the remainder can be gasified either to generate electricity directly or to make fuel liquids. To state that "there is no such thing as a sustainable biofuel" is nonsense.
The company that I recently joined reforests degraded and marginal tropical land with a drought-resistant tree, jatropha curcas. After planting in small hand-dug holes it then takes five years before full fruiting. The fruit contains seed that can be crushed to give non-edible oil for use directly in heavy diesels or to be refined into high-specification fuel. The protein-rich seed cake left after oil extraction is useful too.
Cultivation and fruit picking by hand is labour-intensive and needs around one person per hectare. In parts of rural India and Africa this provides much-needed jobs - about 200,000 people worldwide now find employment through jatropha. Moreover, villagers often find that they can grow other crops in the shade of the trees. Their communities will avoid importing expensive diesel and there will be some for export too.
Mr Monbiot, there are biofuels and biofuels. Some make good sense.
Lord Oxburgh is non-executive chairman of D1 Oils. He is a former non-executive chairman of Shell, chief scientific adviser to the Ministry of Defence, and professor of mineralogy and petrology at Cambridge University
Russia signalled yesterday it was set to continue its hardline approach to opposition and the west under Dmitry Medvedev, its new president, as it cut gas supplies to Ukraine and police detained demonstrators in Moscow.
The moves came just hours after Mr Medvedev, who took 70.2 per cent of the vote in Sunday's election, said he would take charge of Russian foreign policy after his May 7 inauguration, but pledged to continue the course of his mentor, Vladimir Putin.
Several hundred members of pro-Kremlin youth groups including Nashi, or "Our Own", marched towards the US embassy in Moscow to protest over US foreign policy towards Kosovo and Iraq.
Western capitals have seized on Mr Medvedev's reputation as a comparative liberal among the Russian leadership as providing hope of an improvement in relations, which have cooled under Mr Putin.
A spokesman for Angela Merkel, German chancellor, said "democratic and constitutional principles were not always complied with" in the election. But officials in her office said Ms Merkel planned to travel to Moscow as early as Saturday to meet the Russian president-elect.
Ms Merkel would use the trip - yet to be confirmed - to discuss the president-elect's plans for "Russia's modernisation" as well as Germany's concerns over the election campaign.
A spokesman for George W. Bush said the US president was "looking forward to working with" Mr Medvedev. He expected the two men would "have a chance to talk" in coming days.
The US argues it is in the interest of both countries to continue their co-operation in areas such as counter-proliferation and counter-terrorism. Co-operation is also essential in the US push to impose stiffer sanctions on Iran over its nuclear -programme.
The meeting between Ms Merkel and Mr Medvedev will take place against the backdrop of a second energy standoff between Russia and Ukraine since 2006, when gas supplies to Europe were hit during a price dispute.
Gazprom, the Russian gas monopoly that Mr Medvedev still chairs, cut gas deliveries yesterday because of unpaid bills. Sergei Kupriyanov, a spokesman, said shipments to Europe would not be affected, but Ukraine had failed to pay $600m (€395m, £302m) for 1.9bn cubic metres of gas received this year. Gazprom was a reliable supplier "but we cannot and should not supply gas without payment".
Oleksandr Turchynov, Ukraine's first deputy prime minister, hit back by accusing Russia of failing to pay for gas transit bills since December. Gazprom denied the allegation.
Moscow and Kiev broadly agreed a deal three weeks ago under which Ukraine would pay more than $1.5bn in gas debts and would cut out two intermediaries, Rosukrenergo and Ukrgazenergo, and replace them with one joint venture co-owned by Gazprom and Ukraine's state energy monopoly.
While officials and some analysts attempted to portray the move as purely about money, critics suggested that its timing sent a message that little had changed in Russia as a result of the presidential campaign.
So, too, did a swoop by hundreds of riot police on dozens of opposition protesters attempting to hold a rally that had not been sanctioned by the authorities. Nikita Belykh, leader of the liberal Union of Right Forces party, was among up to 50 people eyewitnesses said they saw being detained.
Vladimir Ryzhkov, a former independent member of Russia's parliament who lost his seat as a result of rule changes last year, said talk of a possible "thaw" under Mr Medvedev was misleading.
Larry Summers was in full flow. Addressing a packed meeting on sovereign wealth funds at the Davos gathering of the World Economic Forum in January, the former US treasury secretary told the investment arms of foreign governments they should sign up to a code of conduct and be more transparent.
In a telling sign of the shift in the balance of global economic power, the sovereign wealth funds told Summers to get lost. The Saudis accused him of double standards: hedge funds were not being regulated despite causing mayhem in the financial markets, so why pick on SWFs? The Russians — revelling in Washington's discomfort — said American attempts to restrict investment by wealth funds was "not helpful".
This week the fears resurfaced. José Manuel Barroso, president of the European Commission, said Brussels could not allow non-European funds "to be run in an opaque manner or used as an implement of geopolitical strategy".
Barroso's main worry is that Russia — which set up an official SWF last month — is planning to relaunch the cold war, only this time with oil and gas receipts rather than with the Red Army.
Some western governments are suspicious about the motives of sovereign funds that have been buying up assets in developed countries.
Washington, which has launched talks with funds in Abu Dhabi and Singapore, has concerns over Russia's one-time rival communist superpower China, which has grown weary of stockpiling US Treasury bonds and has started to size up physical assets in the west.
However, the EU and the US are in a weak position. They would like all such funds to follow the example of Norway, which has banked its North Sea receipts from the past 30 years in a £300bn-plus long-term investment fund, and the International Monetary Fund is finalising a voluntary code of practice.
This will be revealed in the coming weeks, but if the SWFs choose not to abide by it, there is little Brussels and Washington can do. The fivefold increase in the price of crude oil to more than $100 a barrel has provided a windfall for the coffers of oil and gas producing countries, while the nations of east Asia have amassed huge holdings as a result of export-led growth. Britain, as a report by PricewaterhouseCoopers pointed out this week, could have built up a £450bn sovereign wealth fund had it not spent its North Sea bonanza on politically expedient tax cuts and higher public spending.
Elsewhere, sovereign funds are rich, they are growing in size and they have been bailing out the west's tottering banks after ill-advised speculation saw their assets slashed in value by the American sub-prime mortgage crisis. The Abu Dhabi Investment Authority — the world's biggest SWF — has taken a $7.5bn (£3.8bn) stake in Citigroup; one of Singapore's funds has injected $11bn into the Swiss bank UBS, the other has invested $5bn into Morgan Stanley. China has ploughed $5bn into Merrill Lynch.
A study by one of the biggest banks, HSBC, noted: "The owners of emerging SWFs look unlikely just to roll over. They are enjoying the boot being on the other foot after an awfully long time. The train wreck that was the 1990s, when they had to go cap-in-hand to the developed world, was bad enough.
Going back further, western jibes about state capitalism would, perhaps, have more power had they themselves not ruled many of these countries for years via state-licensed companies."
Gerard Lyons, chief economist at Standard Chartered, said: "Sovereign wealth funds have existed since 1953 and are here to stay. Their size and influence is set to grow. Already valued at $2.2tn on current trends, they could reach $13.4tn in a decade.
"There is a serious likelihood of western governments and SWFs clashing over what they can buy and where. A protectionist backlash against strategic investments is real and threatens global trade."
The growing tension erupted in 2006 when the US prevented Dubai Ports from taking control of six American ports on grounds of national security. Lyons believes that western governments will seek to protect national champions and strategic sectors, but that SWFs are also likely to take a tough line.
"Many governments will argue that it is their money and why should they be so transparent when other areas of the financial markets are not. "Western countries may need to accept the rise of SWFs as a further sign of a shift in the world economy and should seize this opportunity to work with emerging economies such as China and Russia and others to find common ground rules and a code of practice."
There are few signs that SWFs are being used as an instrument of foreign policy, although Brussels clearly has misgivings about the Kremlin's intentions. Equally, there is evidence that the governments behind the SWFs are enjoying the clout their wealth has given them. And with no immediate end in sight to the credit crunch, their bargaining position is strong and getting stronger.
"From the Latin American debt crisis of the 1980s, through the Tequila crisis of 1994-5, the Asian crisis of 1997 and Russia's default to Argentina's even larger one in 2001, the emerging world always with its finances in a parlous state, rocked from one crisis to another," HSBC said. "Now, huge quantities of money from the emerging world — some $60bn at the last count — are injecting a measure of stability into the developed world's arteries: some of its biggest, boldest and brashest banks, brought low, in their turn, by investments and finances that were themselves, it now transpires, an awful lot less stable than they or most others had assumed."
China National Offshore Oil Corp.'s $16 billion plan to develop an Iranian gas field is a "commercial act," a Chinese official said, as pressure grows from the U.S. for fresh action over Iran's nuclear program.
"China is paying close attention to the nuclear issue in Iran," foreign ministry spokesman Liu Jianchao said at a regular briefing in Beijing yesterday. China National's plan "is a specific commercial act," he said.
Iran has rejected two United Nations Security Council demands that it stop enriching uranium, a process the U.S. and its European allies say they suspect is intended to produce nuclear weapons. The U.S., Britain and France will seek a Security Council vote tomorrow on a draft resolution that would impose a third round of sanctions.
Iran postponed the Feb. 27 signing of a contract with China National Offshore because a religious holiday in the Middle Eastern nation made the timing unsuitable.
The agreement between the parent of Cnooc Ltd. and Iran's Pars Oil and Gas Co.
may be signed next week, Berouz Majedi, in charge of press affairs at the Iranian company, said Feb. 27.
Iranian businesses and government offices were shut yesterday for Arbaeen, which marks the end of a 40-day mourning period following the martyrdom of Imam Ali, the first Shiite Imam and the grandson of Islam's Prophet Mohammad. There is no newspaper circulation today either, for the Iranian weekend.
An initial agreement between Iran and China National Offshore, the nation's third-largest oil producer, to develop the North Pars project has been signed, Iranian Oil Ministry Kazem Vaziri-Hamaneh said May 2.
The field in the Persian Gulf holds an estimated 80 trillion cubic feet of gas.
It is 85 kilometers (53 miles) north of the South Pars field, the world's biggest gas deposit, which Iran shares with Qatar.
A 1996 law in the U.S. calls for penalties on foreign companies that do business in Iran.
Sweden will propose a 30 percent reduction in greenhouse-gas emissions by 2020 by lowering pollution from cars and raising taxes on carbon-dioxide output, said Maud Olofsson, Sweden's enterprise and energy minister.
The government will offer legislation later this year to reduce global-warming emissions 30 percent below 1990 levels, Olofsson said today at a renewable energy conference in Washington. Sweden's current target is a 17 percent cut.
"We want to put pressure on the rest of the world to set a global agreement," Olofsson said in an interview.
The key to reaching the new target is lowering greenhouse- gas emissions from cars, Olofsson said. The new law will aim to shift commuters to railways, she said.
The law will also propose an increase in Sweden's tax on carbon emissions. The country enacted a carbon tax in 1991.
"We have to put a higher price on carbon," Olofsson said.
Sweden has cut carbon-dioxide emissions 9 percent since 1990. During that period, the European country's economy has expanded by 44 percent, Olofsson said. Renewable energy provides 40 percent of Sweden's energy, the highest level of clean energy in the world, she said.
"And of course," Lovelock says, with a smile 43 years later, "that's almost exactly what's happened."
Lovelock has been dispensing predictions from his one-man laboratory in an old mill in Cornwall since the mid-1960s, the consistent accuracy of which have earned him a reputation as one of Britain's most respected - if maverick - independent scientists. Working alone since the age of 40, he invented a device that detected CFCs, which helped detect the growing hole in the ozone layer, and introduced the Gaia hypothesis, a revolutionary theory that the Earth is a self-regulating super-organism. Initially ridiculed by many scientists as new age nonsense, today that theory forms the basis of almost all climate science.
For decades, his advocacy of nuclear power appalled fellow environmentalists - but recently increasing numbers of them have come around to his way of thinking. His latest book, The Revenge of Gaia, predicts that by 2020 extreme weather will be the norm, causing global devastation; that by 2040 much of Europe will be Saharan; and parts of London will be underwater. The most recent Intergovernmental Panel on Climate Change (IPCC) report deploys less dramatic language - but its calculations aren't a million miles away from his.
As with most people, my panic about climate change is equalled only by my confusion over what I ought to do about it. A meeting with Lovelock therefore feels a little like an audience with a prophet. Buried down a winding track through wild woodland, in an office full of books and papers and contraptions involving dials and wires, the 88-year-old presents his thoughts with a quiet, unshakable conviction that can be unnerving. More alarming even than his apocalyptic climate predictions is his utter certainty that almost everything we're trying to do about it is wrong.
On the day we meet, the Daily Mail has launched a campaign to rid Britain of plastic shopping bags. The initiative sits comfortably within the current canon of eco ideas, next to ethical consumption, carbon offsetting, recycling and so on - all of which are premised on the calculation that individual lifestyle adjustments can still save the planet. This is, Lovelock says, a deluded fantasy. Most of the things we have been told to do might make us feel better, but they won't make any difference. Global warming has passed the tipping point, and catastrophe is unstoppable.
"It's just too late for it," he says. "Perhaps if we'd gone along routes like that in 1967, it might have helped. But we don't have time. All these standard green things, like sustainable development, I think these are just words that mean nothing. I get an awful lot of people coming to me saying you can't say that, because it gives us nothing to do. I say on the contrary, it gives us an immense amount to do. Just not the kinds of things you want to do."
He dismisses eco ideas briskly, one by one. "Carbon offsetting? I wouldn't dream of it. It's just a joke. To pay money to plant trees, to think you're offsetting the carbon? You're probably making matters worse. You're far better off giving to the charity Cool Earth, which gives the money to the native peoples to not take down their forests."
Do he and his wife try to limit the number of flights they take? "No we don't. Because we can't." And recycling, he adds, is "almost certainly a waste of time and energy", while having a "green lifestyle" amounts to little more than "ostentatious grand gestures". He distrusts the notion of ethical consumption. "Because always, in the end, it turns out to be a scam ... or if it wasn't one in the beginning, it becomes one."
Somewhat unexpectedly, Lovelock concedes that the Mail's plastic bag campaign seems, "on the face of it, a good thing". But it transpires that this is largely a tactical response; he regards it as merely more rearrangement of Titanic deckchairs, "but I've learnt there's no point in causing a quarrel over everything". He saves his thunder for what he considers the emptiest false promise of all - renewable energy.
"You're never going to get enough energy from wind to run a society such as ours," he says. "Windmills! Oh no. No way of doing it. You can cover the whole country with the blasted things, millions of them. Waste of time."
This is all delivered with an air of benign wonder at the intractable stupidity of people. "I see it with everybody. People just want to go on doing what they're doing. They want business as usual. They say, 'Oh yes, there's going to be a problem up ahead,' but they don't want to change anything."
Lovelock believes global warming is now irreversible, and that nothing can prevent large parts of the planet becoming too hot to inhabit, or sinking underwater, resulting in mass migration, famine and epidemics. Britain is going to become a lifeboat for refugees from mainland Europe, so instead of wasting our time on wind turbines we need to start planning how to survive. To Lovelock, the logic is clear. The sustainability brigade are insane to think we can save ourselves by going back to nature; our only chance of survival will come not from less technology, but more.
Nuclear power, he argues, can solve our energy problem - the bigger challenge will be food. "Maybe they'll synthesise food. I don't know. Synthesising food is not some mad visionary idea; you can buy it in Tesco's, in the form of Quorn. It's not that good, but people buy it. You can live on it." But he fears we won't invent the necessary technologies in time, and expects "about 80%" of the world's population to be wiped out by 2100. Prophets have been foretelling Armageddon since time began, he says. "But this is the real thing."
Faced with two versions of the future - Kyoto's preventative action and Lovelock's apocalypse - who are we to believe? Some critics have suggested Lovelock's readiness to concede the fight against climate change owes more to old age than science: "People who say that about me haven't reached my age," he says laughing.
But when I ask if he attributes the conflicting predictions to differences in scientific understanding or personality, he says: "Personality."
There's more than a hint of the controversialist in his work, and it seems an unlikely coincidence that Lovelock became convinced of the irreversibility of climate change in 2004, at the very point when the international consensus was coming round to the need for urgent action. Aren't his theories at least partly driven by a fondness for heresy?
"Not a bit! Not a bit! All I want is a quiet life! But I can't help noticing when things happen, when you go out and find something. People don't like it because it upsets their ideas."
But the suspicion seems confirmed when I ask if he's found it rewarding to see many of his climate change warnings endorsed by the IPCC. "Oh no! In fact, I'm writing another book now, I'm about a third of the way into it, to try and take the next steps ahead."
Interviewers often remark upon the discrepancy between Lovelock's predictions of doom, and his good humour. "Well I'm cheerful!" he says, smiling. "I'm an optimist. It's going to happen."
Humanity is in a period exactly like 1938-9, he explains, when "we all knew something terrible was going to happen, but didn't know what to do about it". But once the second world war was under way, "everyone got excited, they loved the things they could do, it was one long holiday ... so when I think of the impending crisis now, I think in those terms. A sense of purpose - that's what people want."
At moments I wonder about Lovelock's credentials as a prophet. Sometimes he seems less clear-eyed with scientific vision than disposed to see the version of the future his prejudices are looking for. A socialist as a young man, he now favours market forces, and it's not clear whether his politics are the child or the father of his science. His hostility to renewable energy, for example, gets expressed in strikingly Eurosceptic terms of irritation with subsidies and bureaucrats. But then, when he talks about the Earth - or Gaia - it is in the purest scientific terms all.
"There have been seven disasters since humans came on the earth, very similar to the one that's just about to happen. I think these events keep separating the wheat from the chaff. And eventually we'll have a human on the planet that really does understand it and can live with it properly. That's the source of my optimism."
What would Lovelock do now, I ask, if he were me? He smiles and says: "Enjoy life while you can. Because if you're lucky it's going to be 20 years before it hits the fan."
A senior European official has described America's latest offer on climate change as far too little, far too late.
The US climate chief James Connaughton told the BBC that President Bush was ready this year to sign up to an international long-term goal of huge emissions cuts by 2050.
He said the US was also prepared to agree to internationally-binding medium-term goals for its own greenhouse gas emissions.
"America's helping lead the way among the major economies on the way forward after the Kyoto Protocol ends in 2012," he said.
"Included in that is a commitment from the US to join in an international-binding agreement as long as the other major economies do too."
But European climate experts are angry that the White House still refuses to set a date for halting its growth in emissions.
One government official said: "This is nowhere near enough. The rest of the world only cares about tangible US emissions reductions. Until they come up with firm figures for reductions, the rest is meaningless."
Another EU official said there was nothing new in the American offer - but he said the US was becoming much smarter in its presentation of climate change policy, emphasising what it was prepared to do rather than what it would refuse to do.
On Wednesday, Mr Connaughton drew attention to the eight pieces of legislation enacted by the US to increase fuel efficiency across different sectors.
He said the US had offered billions of dollars of incentives towards clean technologies.
He also stressed that the US did not expect China and India to make cuts in emissions for the time being - but wanted them to agree legally-binding plans to restrict their growth in emissions. Without this, he said, cuts in the rich world would be futile.
He also referred to a consistent theme - the failure of the EU to match up to its own rhetoric on climate change.
The EU has pledged to cut CO2 by 20% to 30% in the next 12 years.
But the US says this is unrealistic and will certainly not be achieved on current trends.
One EU official said: "Frankly, we have had global climate policy held up by the White House for years. President Bush won't be in office to sign off the next climate agreement so we really no longer really care what he thinks."
Householders will be able to make money by fitting solar panels or mini wind turbines to their roofs, under proposals to be announced in the Budget next week.
Those who generate their own renewable energy through the devices will be able to sell their surplus electricity to the National Grid, at a guaranteed price.
The scheme, known as "feed in tariffs", gives long-term financial security to homeowners who install the expensive electricity generation equipment.
It has been highly successful in Germany but the Government is said to have held out against new rules for small-scale power generation since Labour was elected in 1997. There are more solar panels in the German city of Freiburg than in the whole of Britain.
The Government has now decided to embrace feed-in tariffs.
Malcolm Wickes, the energy minister, told an evidence session on the Energy Bill the Government is looking at new proposals to boost micro-generation - where homes and businesses produce their own electricity - including a feed-in tariff.
The Conservatives said the Government decision to consider feed in tariffs represented a massive U-turn. They also claimed it was a new example of Gordon Brown's government "stealing" a Tory policy, following decisions to raise the threshold of inheritance tax and pinch Tory plans for taxing flights not passengers. David Cameron announced the Tories' support for feed in tariffs at Greenpeace's offices just before Christmas.
Peter Ainsworth, the Tory front-bench environment spokesman, said: "This is a huge U-turn. I don't mind if the Government pinches our policies because it indicates that we are leading the debate on ideas for dealing with climate change.
"It is a pity that the Government has done nothing for 10 years when it could have come up with our policies. If they mean what they say it will transform the market for electricity generation in this country. The question is are they serious? Or are they just saying things that we said because they know they are right and popular?"
John Sauven, executive director of Greenpeace: said: "At last the Government is giving in to common sense. Feed-in tariffs have been proven the world over to be the most effective and economic way of creating a successful renewables sector.
"This Government has clung to a complex mechanism that costs more than feed in tariffs and delivers less. If we are to meet our commitments on renewable energy we will need this kind of low cost and effective support for clean technologies to really take off."
A spokesman for the Department for Business, Enterprise and Regulatory Reform said the proposals to create feed in tariffs for micro-generation would not affect large renewables schemes, which would continue to be funded by the Renewables Obligation, which ministers still considered "fit for purpose".
New EU targets state Britain must generate 15 per cent of its energy from renewable sources by 2020.
The companies fear ministers are considering a windfall tax on the industry after a public outcry greeted moves to raise household bills by as much as 15% in recent weeks.
British Gas, whose Centrica parent group is behind a number of wind farm and other renewable schemes, said it was vital companies had a "stable, predictable investment climate" in Britain if they were to deliver the billions of pounds of funding needed for green power generation.
Drax, the owner of the country's biggest single coal-fired power station, also issued a clear warning to ministers. "A surprise or shock tax is very destabilising for the industry when making long-term investments," said Dorothy Thompson, the chief executive of the company.
Alistair Darling, the chancellor of the exchequer, could take advantage of the rising public resentment about the behaviour of the country's big power providers to raise much-needed revenue. But he will also be wary about opening a new front of attack on industry at a time when he is under fire from the City over his handling of business tax issues.
The last time a windfall tax was imposed on North Sea operators in 2005, it brought short-term gains to the Treasury but led to a slump in drilling activity that ultimately cut tax revenues.
Labour did, however, successfully levy a windfall tax on the newly privatised utilities in 1997, raising £5.2bn to fund the New Deal to bring long-term unemployed back into work.
The Commons' environmental audit committee entered the fray yesterday by urging the Treasury to take steps to "respond to climate change on the scale and with the urgency recommended in the Stern review" while Friends of the Earth called for a windfall tax to pay for a £5bn climate change super-fund.
But additional taxes could jeopardise investments in green technology, say the power generators.
"While all these technologies are low or virtually zero-carbon, they are also very expensive, costing around three times as much as traditional gas-fired power generation," said a spokesman for British Gas, whose residential arm recently reported annual profits of £571m, five times more than the year before.
The energy companies are under increasing pressure after raising domestic gas and electricity prices while reporting ever higher profits to the City. Earlier this week the Treasury called in power bosses from British Gas, E.ON and others to discuss "fuel poverty" while the regulator, Ofgem, has announced an inquiry into prices.
In January Ofgem declared that power companies had made £9bn of windfall profits through the emissions trading scheme and should use this to help householders pay fuel bills.
Critics have pointed out that Norway has taken a more robust attitude to energy companies and built up a £100bn fund for future generations through taxing their North Sea oil and gas operations. But Tony Ward, a director of the utilities practice at the accountants Ernst & Young, said the government should think carefully about imposing a tax. "To do so may impact on much-needed investment in the UK, may appear to be reintroducing price regulation, and may do harm to the UK's longer-term carbon emissions goals," he said.
Drax, whose Yorkshire plant is the largest single producer of carbon in the UK, has been trying to reduce its impact on climate change by burning some plant biomass, which is seen as less damaging to the climate than coal, as it absorbs as much CO2 from the atmosphere while growing as it releases when burnt.
Drax said it was aiming to generate 10% of its electricity from green sources. "We're fairly certain we'll hit the biomass target by the end of 2009, and absolutely certain to get there by the end of 2010," said Thompson yesterday. She was speaking as the company reported annual underlying pre-tax profits were down 16% to £439m in 2007 due to a rise in coal prices.
Britain’s biggest energy companies are holding talks with the Government about a deal to provide subsidised heating and electricity to the 4.5 million people thought to be living in fuel poverty.
Industry chiefs have been summoned to a series of meetings in Whitehall in recent days where they have been attacked for reporting huge profits while not doing enough to help those struggling to pay bills. After the latest price rises the average household fuel bill now exceeds £1,000 a year.
Energy companies spend just 0.11 per cent of their £24 billion turnover helping to tackle fuel poverty, defined as households that spend more than 10 per cent of income on energy.
They have been threatened with a windfall tax on profits if they do not help to fund a nationwide scheme. The Government wants them to contribute to a fund and is considering matching industry payments with taxpayer contributions. The fund would allow for the creation of means-tested, standardised energy tariffs for low-income groups. Alistair Darling is expected to announce further details of the scheme on March 12.
National Energy Action, the charity, claims that half a million more households were plunged into fuel poverty earlier this year following the latest price increases. The Government’s goal of eradicating fuel poverty by 2016 has been thrown into jeopardy.
There is dissatisfaction that in the past two months power companies have been raising prices by as much as 15 per cent while reporting huge profits. British Gas, for example, reported earnings of £571 million last month. Officials within the industry say that the big six energy companies, five of which have already raised their prices this year, are moving closer to agreeing concessions with the Treasury.
“The Government is exercised about this issue and the industry does not want a windfall tax, so they are likely to agree to some kind of deal,” said a source close to one of them. “It’s easier for everyone to swallow.”
He said that the details had not yet been agreed. Other measures that have been proposed include having individual households sign long-term contracts that would encourage power companies to invest in improving energy efficiency in their homes.
Leaders of three of Britain’s biggest power groups — Sam Laidlaw, chief executive of Centrica, which owns British Gas, Paul Golby, chief executive of Powergen, and a representative from EDF, will meet Malcolm Wicks, the Energy Minister, Yvette Cooper, Chief Secretary to the Treasury, and Geoffrey Norris, the Downing Street adviser, today to discuss the proposals. A meeting was held last week with the heads of Scottish and Southern Energy, Scottish Power and RWE NPower.
Several schemes already exist to assist low-income groups, but there is no standardisation and Energywatch believes that they help only one in 15 households living in fuel poverty.
Some companies spend significantly more on the problem than others. British Gas, for example, spends 0.49 per cent of its turnover, while SSE and NPower pay just 0.07 per cent. Energywatch said in January that, if all of the companies matched British Gas’s spending, an additional £72 million could be raised to help poorer households.
Spokesmen for the Treasury and the Department for Business, Enterprise and Regulatory Reform declined to comment.
Ofgem, the energy watchdog, launched an investigation into the power and gas supply markets on February 21 because of growing public concern about rising prices, which the companies have blamed on wholesale gas prices and the need to invest more in low-carbon energy generation.
Power companies are being asked to spend billions of pounds investing in low-carbon generation over the coming years, including nuclear and renewable energy. The industry said that a windfall tax on profits would damage its ability to make investments to secure long-term energy supplies.
Gordon Brown has warned retailers he will force them to cut down on plastic bag use if they do not act voluntarily.
Writing in the Daily Mail, he told stores that "If government compulsion is needed to make the change, we will take the necessary steps."
Campaigners say plastic bags, which take an estimated 1,000 years to decay, damage the environment.
Marks and Spencer has already announced that it will charge food shoppers 5p for each bag from 6 May.
The move follows a trial at 50 of its outlets in Northern Ireland and south-west England, which resulted in demand for polythene bags falling by more than 70%.
Mr Brown praised the chain - which says the money raised will go to environmental charities - as well as Ikea, which stopped providing single-use plastic bags from its branches in July 2007.
But he insisted that, if other stores did not follow suit, the government would be "ready to do what it can".
"We do not take such steps lightly - but the damage that single-use plastic bags inflict on the environment is such that strong action must be taken," he said.
Ideally, he said, any scheme to cut down on their use would also secure funds for environmental organisations.
Downing Street did not give a timescale for any legislation to force shops to cut down on plastic bags.
Mr Brown added that carrier bags were one of the most visible and easily-reduced forms of waste and shoppers, supermarkets and the government all had to "accept our own responsibility for ending the environmental damage we are causing".
He said he and his wife, Sarah, had tried to cut their carbon footprints by fitting solar panels to heat water at their home in Scotland, recycling and composting, using the train, choosing low-energy electrical goods and trying not to leave them on stand-by.
But nonetheless, he said, they would end up with "a bin full of plastic bags" after supermarket deliveries, with each bag often only carrying a few goods. "This cannot be right," he added.
An estimated 13bn carrier bags are given away to UK shoppers each year.
Meanwhile the Conservatives have released official figures which indicate that government departments and agencies have bought more than 1.2 million plastic bags branded with their logos over the last two years.
Shadow communities and local government secretary Eric Pickles said: "Labour should practise what they preach and start showing some social responsibility."
But Downing Street said the Government's Central Office of Information had put in place plans to cut Whitehall's carbon footprint and use fewer plastic bags.
A Downing Street spokeswoman said: "Following the Prime Minister's announcement today, I think we can expect that use of single-use plastic bags will be reduced in line with the aims for the wider business community."
ODAC Guest Commentary
This is the third and final part in a series of comments on Professor Peter Odell's article that appeared in the UK newspaper The Guardian on February 15th, itself a response to an article in the same newspaper by Dr. Jeremy Leggett on February 5th.
In my two previous comments I pointed out the need to use '2P' discovery data if one wished to identify the date of a region's resource-limited oil production peak; and noted some of the countries already past peak that were cited by Professor Odell as offering significant likely future increases.
Here I want to address briefly five further topics: the scope for enhanced oil recovery (EOR) to impact the predicted date of global peak; the likely availability of non-conventional oil; the fact that regional peaks do not provide a direct analogy for the world peak; the need to examine net-energy rate limits to energy change; and the possible adoption of Colin Campbell's 'Depletion Protocol'.
1. EOR: As many know, the amount of conventional oil recovered from oil fields is only a part of the total oil-in-place. There is some dispute as to how large is this fraction as a volume-weighted global average, but between 40% and 50% seems likely. So there is a lot of oil 'left-behind'. The question is: can this be accessed rapidly enough to impact the date of peak? My co-authors and I addressed this question to some extent in our 'Energy Policy' article referred to previously; and estimates for the increase in recovery rate from existing fields are explicitly built in to most of the detailed models I mentioned earlier. On balance, while undoubtedly EOR will access significant quantities of extra oil in future, and certainly a high oil price will encourage this process, with the global conventional peak predicted as very close the scope for EOR to significantly delay this peak is small. Nevertheless, all the detailed models could - in my judgement - benefit from more detailed reservoir engineering assessments to firm up these estimates.
2. Non-Conventional Oil: As many also know, the world contains very large amounts of non-conventional oil. Canada's tar sands and the Orinoco heavies each contain - at current assumptions on recoverable oil - about 10 years' worth of global supply; while shale oils have far more potentially available. In addition, there are many other sources of oil and direct oil substitutes, including natural gas liquids, gas-to-liquids, coal-to-liquids and biofuels; as well as ways to substitute away from oil use, such as electric vehicles. As mentioned previously, most detailed models find that it is difficult - or impossible - for these oils in aggregate to fill the gap between the approximately annual 2% 'business-as-usual' growth that has been assumed until very recently, and the expected annual decline of 3% or so in conventional oil production once its peak is past. Taken together, this 5% 'gap' equates to needing an extra 4 million barrels/day or so to come on-stream each year from the non-conventionals. This is a tall order, given the many constraints - including increased CO2 - that accompany these fuels. However, Professor Odell is right to point out that demand destruction accompanies a high oil price, and this will make the gap easier to fill. This leads directly to the next point.
3. Regional peaks vs. global peak: Over a hundred large regions of the world - countries, US states, on-shore and offshore regions - have gone past their resource-limited peaks. These peaks teach us much about how peaking occurs. But when these regions peaked, there were always other parts of the globe one could turn to for oil. This will not be the case with the global peak; so it is to the 'alternative oils', and to demand destruction, that we must look to force supply and demand to balance. Several analysts point to a 'bumpy plateau', CERA and the UK government's former Chief Scientist among these. Such a bumpy plateau may indeed be the case. But driving this plateau will still be regions with the sharp peaks we have come to expect from the US lower-48, Norway, the UK and so many others. And as Lord Oxburgh points out, even a smooth plateau is a very uncomfortable place for a world that once again had come to expect ever-increasing supplies of oil.
4. Net-energy rate limits: So what limits mankind's ability to bring on new sources of energy to replace the declining conventional oil? Clearly needed are a ready technologies, adequate investments, skilled manpower in the right locations, access to enough water, gas or other inputs for the processes in question, enough room for tailings if produced in large quantities, and the willingness to accept the CO2 impacts - or to sequester. The excellent study by Hirsch, Bezdek and Wendling on the time needed to adjust to an oil peak is essential reading in this regard. But also perhaps - and in my view very probably - there is a need to understand the net-energy rate-limits that limit the useful rate that any energy change can be brought in. Virtually all new energy sources, and energy savings schemes, employ some energy to introduce. A simple calculation shows that if growth in the use of these sources, or in the deployment of these schemes, exceeds a critical annual rate no net energy is produced by the sources, or saved by the savings schemes. At the end of the growth period, large energy sources or energy savings become available; but during the growth phase the overall energy produced, or saved, is zero. This effect is proportional: at half the critical growth rate only half the extra energy supply, or energy saving, is achieved; at above this rate the net energy is negative; society is worse off in energy terms. Because peaking is only recently becoming re-understood, few as yet have done the requisite calculations. Such calculations are needed if we are to understand the possible energy paths that lie open to us.
5. The 'Depletion Protocol' of Colin Campbell: At present we have a high oil price. It may go away for a while - several large new oil projects are underway - but generally a high price is to be expected into the future until some major shift in the global energy supply/demand balance occurs. High oil prices have already hurt developing countries, and are a contributory factor in the global slowdown. In addition, the large international transfers of funds have consequences that are mixed. A simple way to manage the situation was put forward by Dr. Colin Campbell in his 'Depletion Protocol' Details of this can be found on various websites, but in essence its says that countries decide individually to manage their demand down in line with the fairly modest expected decline in global oil supply. This takes the pressure off prices, and allows rich and poorer countries alike to face more stable economic conditions. Probably the Protocol is too idealistic for the real world in which we live, but it points up the advantages of intelligent demand management; and its concept allows us to understand that there is nothing inevitable about high prices in a resource-constrained world. The market can be very efficient at helping us allocate scarce resources. But it fails completely where something important is outside the market's cost function, whether this is CO2 (see Stern) or other pollutants, health and safety issues, or fairness and social stability. In all such cases modern governments add legislation, or impose costs, to constrain the market. Oil depletion may well be such a case.
In conclusion I would like to finish this series by noting:
- It is a pity we have had to wait for $100/bbl oil before the calculations by competent scientists have been examined in detail.
- The peak of conventional oil is not the end of the world. We still have half of this left; a lot more to access, if slowly, by EOR; and many non-conventional oils and oil substitutes.
- However, the emissions of CO2 - especially of coal and coal-to-liquids if the world moves rapidly in this direction - may indeed be the end of an easily habitable world for mankind; so the oil peak needs to be looked at closely by the IPCC modellers.
- Mankind has shown it can collaborate if faced with difficult problems. The successful treaties on the law of the sea, on maritime transport, on activities in the Antarctic, on various pollutants including CFCs and more recently other POPs, and the recent institution of an international criminal court all point to what can be done. But first the problem must be understood.
I hope these comments have helped in this regard. Many thanks for reading this. - Roger Bentley.
Dr. Roger W. Bentley is Visiting Research Fellow, Department of Cybernetics, University of Reading
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