ODAC Newsletter - 20 June 2008
Welcome to the ODAC Newsletter, a weekly roundup from the Oil Depletion Analysis Centre, the UK registered charity dedicated to raising awareness of peak oil.
In a week which saw another record oil price of $139.89, there is much global interest resting on a meeting called by the Saudi King to be held in Jeddah on Sunday. The fact that the Saudis have determined to call this meeting unilaterally, would indicate that they are feeling the pressure. The Saudi Royal Family is entirely dependent on oil for its survival. Demand destruction amongst its key allies is not in its interests and winning new friends in the growing economies clearly is. Continued unrest over fuel prices around the world certainly has world leaders hoping that the Saudis have more than words of sympathy on offer, although so far the markets have remained largely unmoved by the various rumours of an impending announcement of a boost in output.
Gordon Brown will be going to Jeddah. Here is a man who is looking for good news after an annual banquet at the Mansion House, which must have been harder than usual to swallow. Both Mervyn King of the Bank of England and the Chancellor, Alastair Darling blamed the outside factors of rising fuel and food prices for above target UK inflation and a downbeat economic outlook. Both however share an optimism that things will be back on track soon. The Conservative leader David Cameron meanwhile also made a speech this week addressing economic downturn, in which he promised that the Conservatives would pursue green policies despite it. While this was encouraging and eye catching, as things stand, both parties are attempting to manage increasing energy insecurity and be green while governing the economy in a ‘business as usual’ mode. The fact that actual reduction in energy usage will be required and the incompatibility of this with an economy driven by consumption remains entirely unaddressed.
In the world’s biggest oil guzzling economy, the race for the White House is on and energy policy is high on the agenda. The candidates clashed this week over renewables and whether their expansion should be government funded. McCain came out against this kind of government intervention into the market. Whichever view you take, if Alan Greenspan, or more recently Brigadier-General James Ellory, are right and the Iraq War was all about oil, then any amount of money invested by the government in renewables would be a drop in the ocean compared to that invested in oil.
The candidates also differ in their stance on opening up off-shore drilling rights. Hopefully Obama’s comment that “This is not something that's going to give consumers short-term relief and it is not a long-term solution to our problems with fossil fuels generally and oil in particular“ can open up an informed debate on energy constraints and prevent reflex reactions. In the meantime we can take comfort from the fact that Senator McCain wants to save the environment for hunting, fishing and the enjoyment of national treasures. Good to know that the environment, at least as a playground, is safe in his hands.
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The potential for permanent demand destruction is worrying Riyadh, which – together with diplomatic prodding by the US and other members of the Group of Eight industrialised nations – has prompted King Abdullah to shift the kingdom’s focus. In April, the Saudi leader said: “I keep no secret from you that when there were some new finds, I told them: ‘No, leave it in the ground, with grace from God. Our children need it.’”
But with the risk that future generations could face a world where consumers have turned away from oil to alternative energies and more efficient use of hydrocarbons, the monarch has changed his tune, on Sunday telling Ban Ki-moon, United Nations secretary-general, that he was willing to do what he could to bring the oil price to a reasonable level.
That is likely to include bringing oil from new fields on to the market. But no one knows exactly what this will involve because the kingdom is so secretive about its oil industry, giving little information on the timing of new fields coming on line.
Traders believe Saudi Arabia could cut prices for its oil and announce anything from a 200,000 b/d to a 750,000 b/d increase in production. This means international oil futures prices are likely to be volatile until Sunday.
The big question is whether the Khursaniyah oilfield, which was supposed to start at the end of last year, is ready to pump oil. If it is not, the production increase is likely to be a disappointing 200,000 b/d. If it is ready, the kingdom may make a more “meaningful announcement”, which is how Sam Bodman, US energy secretary, on Monday described a 500,000 b/d boost.
Malcolm Wicks, the UK’s energy minister, on Monday told the Financial Times: “There’s a situation where Saudi Arabia is recognising the international climate, hearing voices calling for an increase in supply...is clearly responding and that does illustrate the pivotal role Saudi plays in the international market.
“Instead of megaphone diplomacy, where people are calling each other across the waters of the world and giving their own analysis, let’s just get together, look at the evidence and see what the evidence tells us and see if that gives us a shared agenda for the future.”
Saudi Arabia, the world’s largest oil exporter, has had only four energy ministers in its modern history and not many more shifts in its oil policy. The previous changes – every decade or so – had massive repercussions on the oil price and the world economy.
Riyadh is this week likely to attempt to make its mark again but, as yet, it is unclear whether the kingdom has the power to make as much of a difference as in years past.
In calling the world’s most powerful countries and the chief executives of some of the biggest international energy groups to a meeting in Jeddah on Sunday, Saudi Arabia has acknowledged that oil prices have risen to unreasonable levels.
By calling the meeting unilaterally, the kingdom is stepping outside the relative comfort of the Opec oil cartel. In the past, Riyadh has used Opec meetings to announce changes in its production policy to deflect some of the pressure from the US and others, even though in the past few years it has become increasingly clear that only Saudi Arabia has the will and ability substantially to change its production levels up or down.
But the meeting also indicates a shift in attitude. For months Saudi Arabia has argued that the market is well supplied and that it was speculators and refinery capacity shortages that were pushing prices to record highs of nearly $140 a barrel. Although analysts agree the world needs more refining capacity, they also blame Saudi Arabia’s recent policy of cutting supplies to drain world crude oil inventories.
From March 2006 until April 2007 the Saudis reduced production from 9.56m barrels a day to 8.53m b/d, leading to six consecutive quarters of inventory reductions and a 2007 drop in global inventories of about 930,000 b/d.
Although the kingdom has since reopened its spigots, the damage has been done, says Leo Drollas, deputy executive director of the Centre for Global Energy Studies, the think-tank created in 1990 by Sheikh Yamani, Saudi Arabia’s energy minister from 1962 to 1986.
Mr Drollas says: “The high oil price is worrying people about the future and causing them to change their habits. Once you sell your Hummer to buy a hybrid, you are not going to come back [to driving a sports-utility vehicle] quickly.”
What Saudi Arabia tells its high-level audience on Sunday will not only indicate the extent of its new willingness to address concerns of the US and other big consumers about high oil prices and lack of decently priced supplies. It will also – perhaps more importantly – show whether the kingdom has the power and resources to wrest back control of the market and ease the burden of high oil prices on the world’s biggest economies.
Washington: President George W. Bush doesn't expect word of oil output additions to come out of a conference between producers and consumers that opens in Saudi Arabia this weekend, a spokesman said.
"No one is expecting to see announcements of increased production," spokesman Tony Fratto told reporters at a White House briefing.
Oil futures for July delivery, which were down more than $2 a barrel this morning, surged on the comments, rising $2.67, or 2 percent, to settle at $136.68 at 2:44 p.m. on the New York Mercantile Exchange. The price reached a record $139.89 on June 16 and has risen 98 percent in the past year.
Energy Secretary Samuel Bodman will lead the U.S. delegation to the conference, which begins June 22 in Jeddah, Fratto said. Bodman said extra output "will help," especially if it's discounted.
"I simply do not know what they're going to announce and how they will go about doing it," he said. "It will be an interesting day."
Saudi Arabia's King Abdullah told United Nations Secretary- General Ban Ki-Moon on June 14 that his country would boost output by 200,000 barrels a day to 9.7 million barrels a day next month, according to UN spokesman Farhan Haq.
Ban told reporters in Jeddah that Saudi Arabia would ``take the necessary measures to stabilize the price of oil," according to a transcript of his remarks.
An OPEC official said June 15 that Saudi Arabia may announce an output increase at the meeting, as there is more demand for Saudi oil from "all over" the world.
He spoke by telephone on condition that he not be identified because no final decision had been taken. He wouldn't speculate on the size of any increase.
Bodman said earlier this week that a Saudi output boost of 300,000 to 500,000 barrels a day would be ``a meaningful gesture" amid record prices.
"If the market had more supply, the price would go down," National Economic Council director Keith Hennessey, said at a White House briefing today. "That's true in the short run, in the medium run and the long run."
Fratto said Bodman's task at the conference would be to "explain our view of how the markets are operating, in terms of supply and demand and also in terms of some things that we think would help, like transparency and greater investment in oil exploration and development around the world."
Four Western oil companies are close to signing oil contracts with the Iraqi government that will return them to the country for the first time in 36 years, the New York Times reported in its online edition.
Exxon Mobil, BP Plc, Royal Dutch Shell and Total, which had partnerships with the Iraq Petroleum Co. before the industry was nationalized by Saddam Hussein, as well as Chevron and a number of smaller oil producers, have been in talks with the oil ministry, it said.
The newspaper cited information from the ministry, oil companies and an American diplomat.
The deals are expected to be announced on June 30 and will be awarded on a no-bid basis. They will be an extension of current agreements in which the companies are providing free advice and training to the Iraqis.
A total of 46 companies, including those from China, India and Russia have memorandums of understanding to provide that assistance to Iraq but were not awarded contracts.
The deals for the four companies will be service contracts, in which they are paid for their work rather than offered a license for Iraq's oil deposits.
WASHINGTON (Reuters) - World oil production capacity has topped out at 85 million barrels per day, billionaire oil investor T. Boone Pickens said on Tuesday.
"I do believe we have peaked out at 85 million barrels a day globally," Pickens, who heads BP Capital hedge fund, with more than $4 billion under management, said during testimony to the Senate Energy and Natural Resources Committee.
U.S. crude futures have risen by a third this year, and more than six-fold since 2002, as surging demand from China and other developing nations outpaces new production.
Oil prices stood above $134 a barrel on Tuesday, after touching a record high near $140 a barrel the previous day.
NEW YORK (CNNMoney.com) -- This week's push for increased U.S. oil drilling - both offshore and in Alaska - is part of a longer-standing debate about the best way to solve the energy crisis: tap domestic reserves or put more emphasis on developing alternatives?
Presumed Republican presidential candidate John McCain called Tuesday for opening more fields off the East and West coasts to drilling. On Wednesday, President Bush reiterated that call and urged development of fields in protected land in Alaska, something McCain still opposes.
But experts say additional drilling would only boost production by about 2 million barrels a day. That's about 20% of domestic oil production, but only about 2% of total worldwide demand, so its impact on prices would likely be marginal. In short, it's not a long-term solution to the nation's energy challenge.
Some say a real solution lies in the government embarking on a massive effort to fund renewable energy - something akin to the Apollo program that put a man on the moon in the 1960s.
Supporters are calling for the government to boost funding from about $4 billion a year now to $30 billion a year - every year for the next few decades.
"That's less than a third of what we're spending in Iraq," said Keith Schneider, a spokesman for the Apollo Alliance, a coalition of politicians, environmentalists, labor groups and businesses pushing the idea. "It's not a big number."
Barack Obama is halfway there. The presumed Democratic nominee wants to fund renewable energy to the tune of $15 billion a year for 10 years, paid for by auctioning off permits to companies that emit greenhouse gases.
McCain also wants to issue permits to pollute in an effort to gradually reduce greenhouse gasses - a plan known as "cap-and-trade" - but he doesn't want to charge companies for them, at least at first.
He also does not support a big government effort to fund renewables, instead relying on the greenhouse gas restrictions and lower corporate taxes to spur private sector investment. It's perhaps the biggest difference between the two candidates' energy policies.
Debating government's role
Plenty of people agree with McCain and say the government has no business in the renewable energy business.
The government already is spending billions on renewable energy, and the private sector even more, said David Kreutzer, an energy economist at the Heritage Foundation, a conservative think tank. More money will likely mean more pork, but not more results, he said.
"There won't be some Brave New World of energy simply because the government spends $30 billion a year," he said "This is just another version of we're going to spend our way to the Jetsons' lifestyle," referring to the animated futuristic family.
And every $30 billion the government takes out in taxes is $30 billion the private sector can't invest on its own, he said.
The Apollo Alliance's Schneider counters that the government has had a long history of being the prime backer, at least at first, of big projects that serve a greater public good. They include land grant colleges, the railroads, the Interstate System of highways and the Internet, he said.
"The government, working with the private sector, has produced tremendous gains in a way that's much more fair than the free market would," he said. "The free market might achieve a cleaner environment, but not at the pace we need to move."
He also said the nation is hardly operating in a free market when it comes to energy, noting the massive government support for the highways that led to urban sprawl and defense expenditures related to protecting oil supplies.
While most people think wind and solar when they hear renewables, Schneider says the project centers around several key points that include typical renewables, but also call for a state-of-the-art high-speed rail system in major urban corridors and improved public transit within cities.
It also calls for better community design that is more pedestrian- and bike-friendly and less reliant on the automobile, a point Obama makes in some detail on his Web site.
Assessing the possible payoff
So what will the nation get for all this money and effort? After all, the U.S. government says that, under current policies, oil, natural gas and coal will still provide the overwhelming majority of the nation's energy two decades from now.
And those in the oil and utility industry often point to the huge amount of power the world consumes and are skeptical renewables could provide even a significant fraction of that anytime soon.
For starters, Schneider said the project would create 3 million domestic jobs.
On the energy front, backers of renewable energy say it could power half the nation by 2030, given enough funding. Clearly, those are forecasts made on not much more than an educated guess.
Voters will decide if $15 billion a year is too big a wager.
President George W Bush has called on Congress to end a 27-year ban on drilling for oil in US coastal waters, to reduce dependence on imports.
Mr Bush said existing restrictions on offshore drilling were "outdated and counter-productive".
His move comes as US consumers are calling for action to tackle high oil prices that have pushed prices at the pump to more than $4 (£2) a gallon.
US energy needs are set to be a key issue in November's presidential poll.
Republican John McCain favours offshore oil drilling, whereas his Democratic rival, Barack Obama, opposes it.
In a news conference at the White House, Mr Bush told Congress there was "no excuse for delay" in lifting the ban.
"Families across the country are looking to Washington for a response," he said.
Environmentalists have reacted with alarm to Mr Bush's call, arguing that off-shore drilling would take at least a decade to have any effect on oil supply and would exacerbate climate change.
Since 1981, a congressional moratorium has prohibited oil and gas drilling along the east and west coasts and in the eastern Gulf of Mexico, an area accounting for some 80% of the US's Outer Continental Shelf.
The federal ban was enacted in part to protect tourism and lessen the chance of oil spills washing on to beaches.
The Democrats, and some Republicans who represent coastal states, oppose ending the moratorium.
Mr Bush, who has repeatedly pushed for an end to the ban, has accused Democrats of using their control of Congress to undermine attempts to boost domestic oil production.
The president also renewed his call on Wednesday for the Arctic National Wildlife Refuge in Alaska to be opened up to drilling.
Kassie Siegel, climate programme director at the California-based Center for Biological Diversity, condemned the Bush offshore initiative.
"This is the culmination of the failed Bush-Cheney energy policy of the last eight years," she told the BBC News website.
"It would do absolutely nothing for petrol prices because it would take at least a decade to produce any oil and even if the oil did flow, there would be the greenhouse gases from the additional fossil fuel development."
She points out that the US government recently calculated there was a 33-51% chance of a major spill in the lifetime of an offshore oil and gas lease in the Chukchi Sea off Alaska.
Such a spill, defined as a release of 1,000 barrels or more from a platform or pipeline, could affect bowhead whales, polar bears and other wildlife.
However, the government's environmental impact statement concluded that "an area affected by such a spill relative to the size of the Chukchi Sea decreases the likelihood that the resources would be widely contacted by the spill".
Senator McCain, the Republicans' presumptive presidential candidate, is opposed to opening up Alaska and had previously backed the moratorium on drilling in coastal waters.
But speaking in Houston on Tuesday, Mr McCain called for the ban to be lifted to help counter US dependence on foreign oil.
"This was a troubling situation 35 years ago. It was an alarming situation 20 years ago. It is a dangerous situation today," he said.
"And starting in the term of the next president, we must take control over our own energy future and become once again the master of our fate."
Mr McCain said the US had enormous energy reserves and was acquiring methods of using them in clean and responsible ways.
Senator Obama dismissed Mr McCain's call as "political posturing" that would not bring down petrol prices and could endanger the country's coastal environment.
"His decision to completely change his position and tell a group of Houston oil executives exactly what they wanted to hear today was the same Washington politics that has prevented us from achieving energy independence for decades," Mr Obama said.
He has called for conservation and the search for alternative green energy supplies.
Analysts say drilling for offshore oil and developing alternatives will both prove slow to reduce US dependence on imported oil.
Drilling for oil off the US coast has the support of John McCain and President Bush, but not Barack Obama.
Despite a plea to Congress by Bush today, the Illinois Democrat rejected lifting the drilling moratorium that has been backed by presidents of both parties for nearly two decades.
"This is not something that's going to give consumers short-term relief and it is not a long-term solution to our problems with fossil fuels generally and oil in particular," Obama said. Click here for more.
Obama earlier had rejected a McCain proposal to cut federal taxes on gasoline over the summer as a way to help motorists shelling out $4 a gallon. The Democratic presidential candidate instead has proposed a windfall profits tax on oil companies and has enouraged massive investment in renewable sources of energy
In backing McCain's plan to re-start offshore drilling today, Bush reversed his previous position and that of his brother, Jeb, an outspoken drilling opponent while governor of Florida. Their father, George H.W. Bush, issued an executive order as president in 1991 banning offshore drilling.
Today, the younger President Bush again proposed opening the Arctic National Wildlife Refuge for drilling, a move that McCain has opposed.
Senator Dick Durbin said oil companies already have the rights to drill on 68 million acres of American soil that aren't currently under development and added that Bush has to deal with ''reality.''
"The reality is oil companies are making profits at record-breaking levels,'' ABC News quoted Durbin as saying. "The reality is that speculation is driving the price of oil up. And the reality is that the president of the United States has yet to call the oil company executives into the Oval Office to tell them they're wrecking the economy."
Offshore oil drilling is a tricky issue politically. The English newspaper The Guardian today cited a Zogby poll indicating that 60 percent of Americans polled favored offshore drilling -- but a same percentage also favored strong fuel conservation measures.
Republican presidential candidate John McCain will push to almost double the number of nuclear reactors in the U.S. as part of a plan to lessen the nation's dependence on foreign oil.
On the second day of a two-week tour to promote his energy security proposal, McCain told an audience in Springfield, Missouri, yesterday that he would increase research in so-called clean-coal technology and push to add 100 new nuclear reactors, almost double the 104 nuclear plants now in use.
"I will set this nation on a course to building 45 new reactors by the year 2030, with the ultimate goal of 100 new plants to power the homes and factories and cities of America," McCain said. "This task will be as difficult as it is necessary. We will need to recover all the knowledge and skills that have been lost over three stagnant decades in a highly technical field."
McCain's remarks build on a speech in Houston on June 17 in which he laid out the elements of his energy plan. Central to that plan is expansion of offshore drilling for oil and natural gas, a proposal that is under fire from his Democratic rival, Illinois Senator Barack Obama, and environmental groups.
"One obstacle to expanding our nuclear-powered electricity is the mindset of those who prefer to buy time and hope that our energy problems will somehow solve themselves," McCain said, noting that Obama's home state of Illinois has more nuclear reactors than any other.
McCain, an Arizona senator, also vowed to spend $2 billion on research into clean-burning coal.
"This single achievement will open vast amounts of our oldest and most abundant resource," McCain, 71, said. "It will deliver not only electricity but jobs to some of the areas hardest hit by our economic troubles.
McCain's energy plan also includes spending on renewable resources such as wind and solar power.
McCain also touted his environmental bona fides at a Chicago fundraiser last night. In a 10-minute film preceding his appearance at the Drake Hotel, McCain made an appeal to outdoorsmen.
"Our ability to hunt and fish and enjoy the great national treasures of America is something I'd like to preserve," McCain said in the film. "I'm committed to preserving the enjoyment of the great national treasures of the most beautiful nation in the world."
Large numbers of small to mid-size ethanol producers could shut down over the coming months after flooding across the US midwest caused irreparable damage to the year’s corn crop and pushed corn prices up sharply, says a report by Citigroup.
At least five small to mid-size ethanol plants had shut down in recent days, said David Driscoll, Citigroup’s US food manufacturing analyst, in an equity research report.
The widespread flooding, on a scale the region has seen only twice in the last 25 years, had forced down ethanol margins over the past 10 days, leaving small and mid-sized ethanol producers running at substantial losses against cash costs, Mr Driscoll said.
“As a result of the rapid margin deterioration, we believe that many, if not all, of the small to mid-size producers will be forced to shut down over the next few months.” This could result in as much as 2bn-5bn gallons of ethanol going off-line in the next few months, he said.
Mr Driscoll said corn – now selling at more than $7 a bushel, compared with about $4 a year ago – meant extreme tightness in the corn market, suggesting the increased potential for political intervention in ethanol markets.
The intervention would be aimed at cutting ethanol output and bringing corn to the food market. Corn prices have risen by $1 in the last 10 days.
“Just the spectre of political intervention will likely cause the market to question the magnitude of future biofuel growth, adding further pressure on valuations across the ethanol industry,“ Mr Driscoll said.
This has led Citigroup to reduce its earnings-per-share estimates for ethanol companies and drop ratings to “sell” on those that are strictly into ethanol production, including VeraSun Energy and BioFuel Energy.
A strike by South Korean truck drivers has cost the nation about $6.57 billion in lost trade, dealing a blow to the main driver of economic growth.
The ongoing strike disrupted $3.24 billion worth of exports and $3.33 billion worth of imports between June 12 and June 18, the Ministry of Knowledge Economy said. That's about 1 percent of the value of South Korea's total trade last month. The ministry will update the estimate at 4 p.m. in Seoul today.
As many as 13,496 truck drivers, including members of the Korea Cargo Workers Union, stopped moving freight nationwide from June 11 to protest surging fuel costs and have demanded higher transport fees and larger government subsidies.
President Lee Myung Bak is scheduled to give a public address at 2 p.m. local time regarding labor strikes and the protests against resumption of U.S. beef imports. He may reshuffle his presidential staff tomorrow and Cabinet next week.
A deal to resolve the bitter fuel drivers' pay dispute was agreed tonight, averting the threat of further strikes.
The breakthrough came at the end of all-day talks between leaders of the Unite union and managers from haulage firms Hoyer and Suckling Transport.
Hundreds of drivers went on strike for four days, leading to fuel shortages mainly at Shell garages across the country.
The union had warned of further strikes this weekend, but that has now been averted.
A brief statement said: "Hoyer, Suckling and Unite are pleased to confirm that they have successfully concluded pay talks."
Following today's meeting at the union's headquarters in London, Unite will recommend a new pay deal to its drivers, details of which were being kept secret.
Drivers will now be balloted over the coming week, with a recommendation to accept.
In the meantime, all industrial action has been called off, including a ban on overtime.
The drivers walked out on strike last Friday at 6am, returning at 6am this morning.
They picketed fuel depots and refineries across the country and warned of a further four-day strike from this Friday.
The government, industry and motorists will breathe a huge sigh of relief that the dispute has been resolved.
The union had been seeking a pay rise to give drivers a basic of around £36,000 and accused Shell of refusing to intervene in the row.
Hundreds of garages were still out of one or more types of fuel today, causing continuing problems for motorists.
Hundreds of truck, tractor and taxi drivers are converging on the centre of Brussels on the eve of a crucial European summit.
The farmers and transport workers are protesting at the crippling effect of soaring fuel prices.
Global oil prices have quadrupled in the past seven years, nearing $140 (90 euros) a barrel in Monday's trading.
There is a heavy police presence in Brussels, blocking access to EU sites ahead of an EU leaders' meeting.
Some streets have already been sealed and police have razor-wire barricades ready to throw across roads if necessary, says the BBC's EU correspondent Laurence Peter in Brussels.
He said an army of tractors were lined up in a park next to the national museums, about 1km (half a mile) from the EU Commission building.
Firecrackers exploded and tractors blared their horns.
One farmer said there were about 1,000 tractors at the protest, though there was no independent count available.
"We want a fair price for our milk and meat," said Emmanuel Tassignon, a farmer from Mons in Belgium's Wallonia region.
"The prices of fertiliser and animal feed have gone up, but the retail price for our produce has not."
French President Nicolas Sarkozy has said he suspects Ireland's rejection of the Lisbon Treaty is an expression of anger over high fuel and food prices.
He has proposed introducing a cap on petrol taxes and using the additional revenue generated by high oil prices to fund aid for the struggling fisheries and transport sectors.
But the EU says that there is little it can do to combat high fuel costs directly, preferring to target its efforts on longer-term measures to promote alternative fuel sources.
Nevertheless, the summit is expected to address high oil and food prices as well as map a way forward for the Lisbon Treaty.
French fishermen have been protesting for weeks, with Belgian and Italian colleagues also involved.
UK, Spanish, Portuguese and Dutch lorry drivers have also held similar protests.
Families will see their standard of living stagnate this year while the value of their homes will fall further, the Bank of England has warned.
The coming months represent the biggest challenge for the economy for two decades, Mervyn King said, adding that some households will find them "particularly difficult".
In his most sombre message yet, Mr King said families were being squeezed hard by higher electricity and food prices on the one hand and slowly-increasing wages on the other.
He told Alistair Darling and leading City dignitaries in London that the experience would be even tougher than the credit crunch, and warned that the "era of cheap mortgage finance... is over".
Mr King said: "This year our real take-home pay will rise at a slower pace than national productivity. Rising fuel, gas, electricity and food prices, mean that average real take-home pay will stagnate this year.
"It will not be an easy time, and I know that some families will find it particularly difficult."
In a blow for The Chancellor of the Exchequer, beside whom he delivered his speech at the annual Mansion House banquet last night, he warned: "The squeeze on real take-home pay will arguably be an even more significant restraint on consumer spending this year than the credit crunch.
"And it will affect the housing market too – lower demand in the high street will go hand in hand with lower demand in the property market."
The Governor said house prices would fall in comparison to families’ earnings - an indication that their values have some way further to drop.
The bleak prediction sent sterling lower in early trading and pushed up the price of UK government bonds.
The speech was the most austere yet delivered by Mr King, who has previously warned that the so-called NICE decade (standing for non-inflationary consistent expansion) was over.
The comments come in a week inflation rose to its highest level in 15 years, outpacing wages and threatening to reduce Britons' standard of living.
Mr King was forced earlier this week to write his second letter of explanation to Mr Darling for allowing inflation to rise above target.
However, the Bank Governor urged families not to panic, reassuring them that this tough period would be short-lived.
"These changes to our spending power and to the housing market are 'real' shifts that, although not easy to accept, we cannot side-step," he said.
"We face the most difficult economic challenge for two decades. But I am confident that we can meet it. Inflation will fall back and growth will recover."
He and the Chancellor urged families not to demand higher wages and push prices even higher.
In his first address to the masnion House event since becoming Chancellor, Mr Darling dismissed suggestions that the economy is heading for a 1970s-style meltdown.
But he warned that inflation did need to be brought under control and that people should exercise restraint in pay negotiations to avoid the current economic woes deepening.
On Wednesday it was disclosed that the Shell tankers' driver strike was called off following a 14 per cent pay rise offer.
Mr Darling said: "I have seen reports suggesting inflation figures show we are returning to the days of the 70’s.
"They are wrong, both in the nature of the problems we face and also in the scale. Today’s inflation must be tackled. We cannot be complacent.
"But in comparison to the 1970s when it reached over 26 per cent, it remains low. Even in 1991, it was still at 8 per cent."
The Chancellor said that inflation was rising as a result of global economic turbulence which was rapidly pushing up the price of food and energy.
Consumers have been warned that gas and electricity bills could rise by up to 40 per cent this winter.
However, Mr Darling urged workers not to make matters worse by pushing for inflation-busting pay rises.
"Continued restraint on pay is required from both the public and private sector," he said.
"We must recognise the need to reward efforts of people who work hard.
"But to return now to inflationary pay settlements would undermine rather than raise people’s living standards with a damaging circle of wage increases eroded by steadily rising prices.
"We must never return to those days."
The warning was sounded amid growing disquiet from public sector unions over the pay increases - which are now below inflation - agreed with the police, teachers, nurses and council workers.
Many are now threatening strike action and are demanding that the pay agreements are renegotiated.
There are growing concerns the resolution of the Shell dispute could encourage further industrial action.
The Government could face a major challenge next week when Unison announces the results of a strike ballot among 600,000 council workers. The workers have rejected a 2.45 per cent pay increase.
In a BBC interview, Mr Darling repeatedly declined to reject suggestions that Britons would face a decline in living standards this year - as their wages would rise by less than the cost of living.
He also insisted that the economic pain was likely to prove short-lived.
"There are very good reasons for people to be optimistic," he said.
"Yes it’s tough, but we can get through it."
Tory leader David Cameron has said he will not be diverted from his "green" agenda by the economic downturn.
In a speech at Westminster's Royal Horticultural Halls, he said Britain "can't afford not to go green".
He called for rules ensuring all new coal-fired power stations include measures to trap CO2 and to encourage the development of "greener" cars.
Environment Minister Phil Woolas said Mr Cameron provided "salesmanship, not leadership" on the environment.
In his speech, Mr Cameron said he would not ignore the financial pressures on people, but would not drop his environmental agenda.
He said any "green taxes" introduced by the Conservatives would be put into a separate fund for tax relief for families
And he said there were easy ways to encourage people to be more energy efficient - such as energy bills which allow each household to compare their gas and electricity bill with others.
Fighting climate change was not a "costly diversion" and over-reliance on oil and gas was "bad for our national security," he said.
"The era of cheap oil is well and truly over," he added.
"So whether we need to cut our carbon or not- which we do, whether you believe in climate change or not - which you should, for the sake of our future prosperity and our current cost of living, we must wean ourselves off fossil fuels and go green."
Mr Cameron said all new coal-fired power stations should have to include measures to trap CO2 emissions and said a Tory government would make researching tidal power in Britain a priority.
He also promised to improve energy efficiency in the home, to encourage "micro-renewables" like homeowners' wind turbines and solar panels by paying them a guaranteed price for energy they create.
And he pledged to draw up a long-term national transport plan aimed at aiding the economy and the environment - arguing that the government's arguments for a third runway at Heathrow airport fell apart under scrutiny.
Green groups welcomed his commitment to emissions standards, which they believe would rule out developments like the controversial new power station planned for Kingsnorth in Kent.
'Ahead of Brown'
Keith Allott, WWF-UK's climate change spokesman said it would "avoid the risk of locking the UK into a high-carbon future" and could boost investment in carbon capture technology.
John Sauven, of Greenpeace, said: "The Tories' proposals should have been more ambitious given what today's technologies can deliver but, by ruling out the proposed old-style coal plant at Kingsnorth in Kent, today's announcement puts Cameron way ahead of Brown when it comes to cleaning up our energy system."
However Environment Minister Phil Woolas said Mr Cameron provided only "salesmanship, not leadership" on the environment.
"The Tory leader continues to talk about introducing new green taxes 'on pollution' but still refuses to give any detail as to what they will be."
He said the government was acting to make Britain "a world leader" on climate change.
Later Mr Cameron and members of the shadow cabinet met US President George Bush - who is on the last leg of his European tour - at the US ambassador's residence.
He described it as a "very productive meeting" which included discussion of concerns about the presidential election in Zimbabwe, free trade and Afghanistan.
BARCELONA- E.ON chief executive Wulf Bernotat on Tuesday reiterated the German utility's interest in building nuclear power stations in Britain, but said it would take at least 10 years before they could start operating.
The British government wants utilities to build new nuclear power stations, which emit almost no climate-harming carbon dioxide, to replace the UK's ageing reactors and secure its future power supply.
"Of course we are interested as a company in building power stations in the UK," Bernotat said on the sidelines of the annual convention European power producers' group Eurelectric.
"Our view is that it would take at least until 2018, possibly a bit later, so 2019-20 is probably right," he said at the event in Barcelona.
Bernotat said each new nuclear power plant would cost 4.0-4.5 billion euros ($6.20-6.98 billion) to build and that his company could do it without financial help.
"This is the sort of investment we can shoulder as a company, we are decisive we can finance it ourselves. We don't think a partner is necessary," he said.
Britain's decision to encorage building the country's first new nuclear power plants in decades has triggered a fierce bidding war for 11 billion pound ($21.64 billion) nuclear operator British Energy (BGY.L: Quote, Profile, Research), which runs eight active stations on sites also seen as prime candidates for new build.
France's EDF (EDF.PA: Quote, Profile, Research) is seen as the front runner for British Energy, while E.ON said in April it was keeping its options open regarding a bid.
Sir Stuart Rose, the executive chairman of Marks & Spencer, has said that high petrol prices are deterring customers from driving to out-of-town retail parks, in the latest example of how the consumer economy is being affected by rising commodity prices.
Sir Stuart said that M&S has noticed changes in shopping habits over recent months. The number of people taking car trips to out-of-town shopping centres has fallen as the price of petrol has risen, he said.
"If a tank of petrol costs 40pc more than it did, are you going to get in the car and go to Bluewater and spend £30 or are you going to go to the high street? We are seeing traffic changes already," said Sir Stuart, speaking at the British Retail Consortium (BRC) conference in London yesterday.
He added that the consumer economy is currently in the middle of its third "big step down" since November.
All retailers are feeling the pinch from falling household budgets. An executive close to another of the UK's largest fashion retailers said that customers are simply not spending. "It has gone way beyond 'shall I get this in black or blue?' or 'is it a ra-ra skirt or a denim one?'. People have no money," said the executive.
This week has seen a flurry of bad news from the sector. Earlier this week the BRC said that consumer confidence has "dropped sharply to new lows".
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