ODAC Newsletter - 09 January 2009
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.
2009 came in with an icy blast – and not just in the weather. Russia’s decision to cut off gas supplies to Ukraine as part of their long-running payment dispute led to gas shortages in Europe and recriminations all round. Energy Secretary Ed Miliband insisted the UK will feel little impact, even as gas supply shortfalls spread to France and Germany. But with UK North Sea gas production declining at 8.7% per year, and with much less storage capacity than in continental Europe, Britain’s energy security looks increasingly fragile.
The arrival of the New Year has done nothing to lift the economic mood. Both Alastair Darling and Gordon Brown now admit that the UK recession will last longer than they expected. On Thursday the Bank of England cut the base rate to a record low of 1.5% and further emergency fiscal measures look increasingly likely. The thrust of the policy still appears to be to get the British public to start spending again. This buy now, pay later policy will surely look horribly expensive as escalating public debt coincides with rising energy prices and import dependency in years to come.
Such is the economic gloom that even Israel’s invasion of Gaza and evidence that OPEC production cuts are beginning to bite failed to sustain the oil price. On Wednesday unexpectedly high US crude inventory figures gave the market its biggest daily drubbing since 9/11. Happy New Year!
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Oil prices plunged back below $50 a barrel yesterday, dragging most of the rest of the commodities sector lower, after the US government reported a hefty increase in crude oil and products inventories.
The surge in stocks was particularly large at the delivery point of the Nymex West Texas Intermediate futures oil contract in Cushing, Oklahoma, which helped to push the US benchmark lower versus the European benchmark Brent.
Crude oil inventories at Cushing surged 4.1m to 32.2m barrels, the highest level since at least April 2004, when the US Department of Energy started tracking supplies there.
The local supply, demand and inventories for oil in the Cushing area have a direct impact on the West Texas Intermediate oil price, often overshadowing global trends.
"The bearishness has nowhere to hide in this report," said Jim Ritterbush, president of Chicago-based oil trading consultancy Ritterbush and Associates. "The crude build is heavily concentrated at Cushing."
Nymex February West Texas Intermediate fell $3.24 to $45.34 a barrel pressured by the surge in inventories. The contract for delivery in March fared better, trading at about $50 a barrel.
Crude oil inventories in the US as a whole rose 6.7m barrels to 325.4m, well above Wall Street's forecast of a small increase of 0.9m.
ICE February Brent - seen by many people in the market as a more reliable indicator of the global oil market - fell $2.20 to $48.33 a barrel, while the contract for March traded above $51.
Oil products inventories, both petrol and middle distillates, such as heating oil, also increased far above Wall Street's expectations, dragging prices lower.
Petrol inventories rose 3.3m to 211.4m barrels, above a forecast of 800,000 barrels. Nymex February RBOB gasoline dropped 7.2 cents to $1.1153 a gallon.
Middle distillates inventories increased 1.8m to 137.8m barrels, almost double the 1m increase anticipated by the market.
Nymex February heating oil fell 4.1 cents to $1.5850 a gallon.
The drop in oil and products prices was exacerbated by gloomy economic news.
The US private sector shed 693,000 jobs in December, according to a closely watched survey of business employment published yesterday. The monthly ADP Employer Services survey, which tracks private non-farm payroll employment, was much worse than economists expected and a surprising increase from the 476,000 jobs lost in November.
Base metals fell across the board on concerns about demand, erasing some of Tuesday's large gains. On the London Metal Exchange, copper for delivery in three months dropped 2.7 per cent to $3,360 a tonne while aluminium fell 1.85 per cent to $1,592 a tonne.
"Inventories continue to rise, while demand remains firmly in the doldrums," said Michael Jansen, metals analyst at JPMorgan.
Gold prices traded slightly lower as the drop in oil prices further dismissed concerns about inflation. In London, spot bullion was quoted at $848.15 a troy ounce, down from $863.15 a troy ounce the previous day.
Agricultural commodities also fell, reversing some of the previous days' strong gains, ahead of next week supply, demand and inventories report from the US department of agriculture.
CBOT March corn fell 9 cents to $4.18 ½ a bushel while CBOT March wheat dropped 16¼ to $6.27¼ a bushel.
Canada's once booming oil sands industry is cooling fast as the plunging oil price undermines investment. More than US$60 billion (£41 billion) worth of projects to extract oil from the bitumen-rich sands of northern Alberta have been delayed in the past three months, according to a study of industry figures by The Times.
A string of companies, including Royal Dutch Shell, Petro-Canada and SunCor, have been among those that have frozen multibillion dollar projects - in some cases indefinitely.
As much as 175 billion barrels of oil are contained in the oil-rich sands of the Athabasca region - second only to Saudi Arabia in a ranking of different countries' proven oil reserves. But the process of extracting crude from sand, either by mining or injecting steam to recover it in situ, is both environmentally controversial, requiring the use of huge amounts of energy and water, and expensive.
The cost of production can be as high as $70 a barrel compared with $5 a barrel for some of the largest onshore oilfields in the Middle-East.
Last year, bolstered by soaring crude prices, which rose as high as $147 per barrel in July, investment poured into projects such as Petro-Canada's Fort Hills development.
But some companies have paused projects as the recession saps global energy demand, driving oil prices down by more than $100. On Friday, US crude for delivery next month was trading around $41 a barrel.
Annette Hester, a Calgary-based energy economist at the Centre for International Governance Innovation and a leading independent expert on the industry, said a number of factors had contributed to the slowdown, including high costs and a less attractive royalty regime introduced last year by Alberta's state government. The global credit crunch has also affected the ability of some companies to raise finance for oil sands projects. “We are absolutely seeing a slowdown in new projects although existing projects are continuing,” she said.
Connacher Oil and Gas of Calgary announced last month that it was suspending one of its projects, the Algar oil sands facility near Fort McMurray. The group cited “the rapid and recent deterioration” in oil prices.
Shell, the Anglo-Dutch oil group, said in October that it was delaying a second expansion of its oil sands project, a decision that independent experts said would affect about $11 billion of investment.
The development, which is located east of Edmonton in the Fort Saskatchewan area, involves the construction of pipelines, extraction plants and an enlarged upgrader which turns viscous bitumen into synthetic crude oil.
A spokesman for Shell said that the group remained committed to the industry and is continuing to invest in construction of facilities that will allow it to produce 250,000 barrels of crude a day by 2010. He said the secondary expansion had been delayed because of high costs and an unfavourable economic environment.
Petro-Canada has also deferred construction of an upgrader for its $17 billion Fort Hills project. Other projects that have been affected include SunCor's $17 billion expansion of its Voyageur oil sands upgrader unit. The expansion is on hold for a year.
Ms Hester said there was also a growing wariness within the industry about the position Barack Obama, the US President-elect, will take on crude oil produced from oil sands and the possibility of more restrictive environmental legislation. She said some companies were exploring the possibility of shifting some of their processing facilities inside the US in order to make a stronger case defending the industry.
Environmentalists have welcomed the delays affecting the industry. A spokeswoman for the WWF said that there were growing questions about long-term viability of oil sands.
“Carbon-intensive businesses do not look suited to a government which is serious about tackling climate change. A high carbon price under a cap and trade system will have a more significant effect with low oil prices,” she said.
About 175 billion barrels of oil are contained in Canada's oil sands
The oil sands are located in three major areas beneath 140,000 square kilometres of northeastern Alberta
The first oil sands mining project began in 1967
In 2007, Alberta produced about 1.8million barrels of crude per day from oil sands, 75 per cent of which was exported to the US
The industry has been widely criticised by environmentalists for its use of large amounts of water and energy and the destruction of huge tracts of land
Iran said on Wednesday it would cut oil output by 545,000 barrels per day from Jan. 1 in line with OPEC's decision to reduce production.
The Organisation of the Petroleum Exporting Countries agreed in Algeria this month to cut output by 2.2 million bpd from Jan. 1 to try to halt the slide in crude prices that have fallen from $147 a barrel in July to below $40.
Some OPEC delegates have in the past voiced concern about Iran's compliance with previous output curbs. Iran, OPEC's second biggest producer, insists it sticks to OPEC commitments.
"The Islamic Republic of Iran, starting from tomorrow, will cut its crude production by about 14 percent," said Seifollah Jashnsaz, the head of state-owned National Iranian Oil Company, the Iran's state broadcaster reported on its website.
"From tomorrow the daily crude production of the Islamic Republic of Iran will be reduced by 545,000 bpd," he said.
"This action by the Islamic Republic of Iran takes place in the framework of executing the decision made at the last meeting of OPEC oil ministers," Jahnsaz said.
He did not give a total output target.
A Reuters survey put Iran's output in November at about 3.9 million bpd, which analysts said was above Iran's output target following OPEC's previous decision to cut output from Nov. 1. Iran's share of that cut was 199,000 bpd.
Leading international oil and gas companies could emerge as winners from the financial crisis, as the steep drop in oil prices and asset valuations creates opportunities for mergers and acquisitions.
The big oil groups generally have strong balance sheets and are still able to raise debt finance, while crumbling equity and commodity prices have made many smaller oil and gas companies potential targets.
William Vereker, co-head of investment banking at Nomura, said the strategic rationale for consolidation in the oil and gas sector was compelling. “In 2009 we expect the pressure of falling prices and declining earnings will create the right conditions for mega-mergers as companies look to take costs out through synergies and rationalisation,” he said.
The five largest international oil companies have a total of $82bn in cash, while independents have about $10bn and private companies have $15bn-$30bn that could potentially be spent on acquisitions, according to Deloitte, the professional services group.
Rajeev Chopra, Deloitte’s head of energy in corporate finance, said valuations were becoming more realistic, as management teams of potential targets accepted that the price of oil was likely to stay low. The big western oil groups have struggled in recent years to raise their production and add to their reserves. Acquisitions appear to be an increasingly attractive source of growth if deals can be done at reasonable prices.
Emerging markets grab a bigger slice of the action
The most striking trend in oil and gas M&A in recent years has been the rise of bidders from emerging economies – a development that hit the headlines with the unsuccessful bid by CNOOC of China for Unocal of the US in 2005, write Ed Crooks and Lina Saigol.
The Chinese companies were quiet in 2007, but activity picked up again in 2008. Sinopec, the second biggest listed oil company, agreed a C$2.1bn (US$1.7bn) bid for Tanganyika Oil, a Canadian company operating in Syria, and is said to be looking for more deals.
Sinochem, China’s fourth largest oil group, paid Soco International $465m last February for a stake in an oilfield in Yemen, and is rumoured to be in talks to buy Soco’s assets in Vietnam.
Taqa of Abu Dhabi, which has an ambitious strategy of expanding through acquisitions, has been one of the most active buyers of energy assets in recent years. It has been talking to London-listed North Sea gas producers about possible deals.
However, the most prominent acquisition by an emerging-market buyer this year has not been an entirely happy experience.
ONGC Videsh of India agreed its £1.4bn ($2bn) bid for Imperial Energy last August, and the steep fall in share and commodity prices since then raised concerns that it was overpaying.
Many smaller exploration and production companies have been struggling to raise cash Oilexco, for example, a Canadian-based independent that was the most active explorer in the North Sea in recent years, has been given until the end of the month to secure further financing. It has attracted considerable interest from companies interested in possible deals, but they seem more likely to pick up Oilexco’s assets than to acquire it outright.
Fox-Davies Capital, the specialist oil and gas broker, says companies with more than 100m barrels of oil equivalent of commercial or near-commercial resources are the most likely acquisition targets. It cites JKX Oil and Gas, Regal Petroleum and Cadogan Petroleum, all of which are developing resources in Ukraine, as potential candidates.
Other companies likely to be attractive are ones with relatively straightforward asset portfolios in resource-rich areas such as Russia or west Africa. Imperial Energy, a London-listed company with Russian assets, was bought for £1.4bn ($2bn) by ONGC Videsh of India last week. Urals Energy, another company operating in Russia, is in talks about a possible takeover, rumoured to be with Sinopec, China’s second-biggest listed oil company.
As for the buyers, mid-sized independent companies are likely to be the most active bidders, according to Mr Chopra, followed by the national oil companies, with the big international oil companies at the bottom of the list.
A “mega-merger”, between BP and Royal Dutch Shell, for example, would be a phenomenally complex transaction, creating a company with almost 200,000 employees and rousing huge political and antitrust concerns.
The big companies seem more likely to go for acquisitions to fill in gaps in their portfolios, as in the recent deals by BP and Statoil-Hydro to buy US gas assets from Chesapeake Energy.
That has been the model for Eni of Italy, the most active of the majors recently, which picked up Burren Energy in 2007 and First Calgary Petroleums in 2008.
In spite of all the arguments pushing companies towards consolidation, however, there are barriers to deals that will need to be overcome. Although the oil price has stabilised, renewed volatility would create fresh uncertainty about valuations. Some potential targets, such as BG Group of the UK, still look expensive.
Financing deals could also be a problem; even the biggest companies will be looking hard at their cash position if oil stays below $50 a barrel.
Tim Chapman, head of international oil and gas at RBC Capital Markets, said: “International oil companies need a great strategic fit to persuade them that a deal is the right thing to spend their money on,” he said.
In what is likely to be a generally depressed outlook for M&A activity, the oil and gas industry can be expected to be one of the more active sectors.
If low oil prices persist, tightening the pressure on the industry, even the most difficult mega-mergers will be back on the agenda.
Oil production on the Norwegian continental shelf may fall 9.7 percent this year, declining for a ninth year, the country’s Petroleum Directorate said.
Crude output will fall to about 110.8 million standard cubic meters, or 1.9 million barrels a day, in 2009, from about 122.7 million standard cubic meters, or 2.11 million barrels a day, last year, the directorate said in a report. Production will drop to 94.4 million standard cubic meters in 2013.
“Between 2009 and 2013 we expect significantly reduced oil production,” Bente Nyland, head of the directorate, said at a press conference in Stavanger. “We expect cost growth to level off or decline next year.”
Norway, the world’s fifth-largest oil exporter and third- biggest natural-gas supplier, pumped its first barrel of oil more than three decades ago in the North Sea. The country is boosting production of natural gas and opening more of its unexplored northern waters to drilling to counter a decline in oil output at maturing fields.
Total petroleum production is expected to fall to 236 million cubic meters of marketable oil equivalents this year and to about 228 million in 2013, the directorate estimates. Petroleum production was 242.2 million cubic meters last year, down 8 percent from a record in 2004.
A record 56 exploration wells were spudded on the Norwegian continental shelf in 2008, up from 32 in 2007, the directorate said. With almost every other well yielding a discovery, this resulted in a record 25 discoveries, of which four were in the Barents Sea, nine in the Norwegian Sea and 12 in the North Sea, the agency said.
Natural gas output is forecast to rise to 102.9 billion cubic meters this year and peak at 112 billion cubic meters in 2011, the directorate said. Production was 99.3 billion cubic meters last year, the agency estimates.
Ten new development plans have been submitted to the authorities for approval in 2009, including the Gudrun field, operated by StatoilHydro ASA, and Eni SpA’s Goliat field.
Norway had an estimated 13 billion standard cubic meters of oil equivalents in petroleum resources at the end of 2008, following an annual gross increase of 39 million cubic meters, the directorate said.
Norway’s oil and gas industry invested more than 130 billion kroner in 2008 amid record oil prices and rising costs on the Norwegian continental shelf, the directorate said. There’s “uncertainty” about what effect the drop in oil prices and the global slowdown will have on investments after 2009, the agency said.
Norwegian fields “have a robust economy at $50 to $70 a barrel of oil,” Nyland said in an interview. “Should prices fall below $50, without production costs going down, projects may be postponed.”
Crude has plunged more than 70 percent from a record $147.27 a barrel in July as the global recession erodes demand.
Nyland said she expected to see consolidation in the Norwegian oil industry in 2009 because of tightening credit and the time-lag in the decline of oil-services costs. This could impact Norway’s 20th licensing round, the production licenses for which will be awarded in the spring.
“We do believe there will be consequences from the change in profitability-level on the continental shelf,” Nyland said. “We’ll see a consolidation in the number of actors. Some companies may withdraw their application.”
BEIJING, Jan 8 (Reuters) - China will become increasingly reliant on imports for its growing oil demand as domestic production sees no big breakthrough in the years ahead, according to a report published by the Ministry of Land and Resources.
China's own oil output is expected to increase by only 5 percent between 2010 and 2015, rising from 190 million tonnes (3.8 million barrels per day) to 200 million tonnes in 2015, said the report published on the ministry's Web site (http://www.mlr.gov.cn/).
That implies growth will stagnate in 2009 and 2010 after crude oil output estimated at 189 million tonnes in 2008.
The ministry forecast that by 2020 the world's second-largest oil consuming country would need 500 million tonnes of oil a year (10 million barrels per day) to keep its economy going, 43 percent more than the 350 million tonnes it consumed in 2007.
So Beijing will have to rely on imports for 60 percent of its oil demand by 2020, up from 50 percent now.
While oil output barely edges ahead, gas production is expected to balloon to 110 billion cubic metres (bcm) in 2010 and 160 bcm by 2015, double the 79 bcm produced in 2008. Gas produced from coal-bed methane projects will also jump from 4.3 bcm in 2007 to 10 bcm in 2015, the ministry said.
Use of China's most abundant but dirtiest fuel, coal, will also keep growing, although at a slower rate than in recent years. Production will hit 2.9 billion tonnes per year by 2010, up 26 percent from 2007, and rise to 3.3 billion tonnes by 2015. Consumption will exceed 3.5 billion tonnes by 2020, the ministry said.
China also plans to ramp up its efforts to find more oil and gas fields to boost its own oil production to help meet demand.
It aims to find at least six new big oil fields by 2010, each with more than 100 million tonnes of geological oil reserves, and 6-8 new natural gas fields, each with 100 billion tonnes of geological reserves, the ministry said.
Beijing also plans on finding another 10 major oil fields and 8-10 big natural gas fields between 2011 to 2015.
Editing by Jacqueline Wong and Jonathan Hopfner
Both sides are competing to exploit the gas and oil beneath the seabed in an effort to reduce their reliance on increasingly expensive imports from politically unstable regions of the world.
Chief Cabinet Secretary Takeo Kawamura said, "The Japanese government has conveyed that such unilateral development by the Chinese side is unacceptable and regrettable. We have lodged protests over the matter."
In an understated criticism of Beijing, Mr Kawamura described the situation as "regrettable."
Tokyo believed it had secured an agreement last year for Chinese and Japanese companies to jointly explore for oil and natural gas deposits in the disputed areas and then extract the fuel for domestic consumption.
Local media has revealed, however, that Tokyo has issued a series of official complaints after learning that Chinese companies were unilaterally drilling. Although they are to the west of the demarcation line, Tokyo claims the Chinese are extracting reserves from beneath the seabed on the Japanese side of the border.
The area, known as Tianwaitian by China and the Kashi Field in Japan, is believed to contain the equivalent of 92 million barrels of oil, but further reserves may yet be located.
China has dismissed Japan's complaints, with a statement released by the Foreign Ministry in Beijing claiming, "Gas fields such as Tianwaitian are located in waters controlled by China that are not under dispute.
"China's development activities in such gas fields constitute the exercising of its sovereign right."
Japan's Ministry of Economy, Trade and Industry has been monitoring the Chinese progress, with patrol aircraft noting the delivery of long pipes to drilling rigs in the area and discoloured water bubbling to the surface, according to Shin Hosaka, director of the Petroleum and Natural Gas Division.
"We believed we had reached an agreement with the Chinese regarding joint exploration and development of these resources and we were planning further discussions on the details," he said. "But we now have evidence that the Chinese are going ahead already.
"The Chinese government has said that what it is doing is legal, but the Japanese government does not agree," he said. "We have again proposed to the Chinese side that we jointly explore for resources but we have not heard back from them yet."
Prior to last year's agreement, both sides had deployed patrol vessels and reconnaisance aircraft in the region and there were concerns that clashes might occur along the disputed boundaries.
Iraq's oil ministry on Monday launched a process to qualify more international energy companies to bid for oil and gas contracts as it seeks to more than double output in the next few years.
Iraq holds the world's third-largest oil reserves and needs billions of dollars of investment to overhaul infrastructure and boost oil and gas output after years of sanctions and war.
Firms that wished to qualify to bid for the contracts must submit applications by Feb. 1, Iraq's oil ministry said on its website http://www.oil.gov.iq/.
An Aberdeen-based oil exploration company has gone into administration, it has been announced, putting dozens of jobs at risk.
Oilexco North Sea Ltd employs about 50 people.
An Oilexco statement said Oilexco North Sea Ltd's operations would continue to be conducted in a safe and orderly manner while a buyer was sought.
Canadian-owned Oilexco's announcement about its Aberdeen subsidiary had been expected.
Tumbling share values and oil prices coupled with the difficulty securing credit had left the company struggling to secure the loans it needed to keep drilling.
The EU, Russia and Ukraine will today hold top-levels talks in a last-ditch effort to resolve the increasingly angry political dispute that has cut off all Russian gas supplies to Europe through Ukraine.
Russia accused Ukraine of "blackmail" and Kiev blamed Moscow for halting supplies without warning as a routine price dispute spiralled into all-out political conflict - and tens of thousands, mainly in eastern Europe, shivered in sub-zero temperatures without heating in their homes.
The EU accused the two countries of making Europeans hostages in their dispute, warning Moscow it risked losing its reputation as a reliable supplier and Kiev its status as an EU partner. But the EU secured a breakthrough when Vladimir Putin, the Russian prime minister, and Yulia Timoshenko, his Ukrainian counterpart, agreed to allow neutral experts to monitor gas flows through the pipeline on either side of their countries' mutual border.
The potential deal was brokered by the Czechs, who hold the EU presidency, José Manuel Barroso, the European commission president, and German chancellor Angela Merkel as Russia and Ukraine intensified their propaganda war. It should enable international monitors to assess whether Russia is pumping Europe's gas through Ukraine's pipelines and Ukraine is, in turn, allowing it to reach paying customers rather than siphoning it off. The EU gets a quarter of its gas from Russia and 80% of this is piped across Ukraine.
The heads of Gazprom, the Russian state monopoly, and Naftogaz, Ukraine's state energy firm, Alexei Miller and Oleh Dubina, are due to meet in Brussels today to try to break the week-long deadlock over long-term price contracts and agree the monitors' arrangement. The pair, accompanied by other senior executives and government officials, will hold emergency talks with EU commissioners and MEPs desperately trying to end a row that threatens hundreds of thousands of Europeans with acute fuel shortages.
Mirek Topolanek, the Czech prime minister, said the next 48 hours could be critical in central Europe and the Balkans. The International Energy Agency, demanding a speedy resolution of the dispute, said Bulgaria, Romania, Greece and Turkey would struggle to provide power and heating if cold weather and gas disruptions continued into next week.
However, Dubina made it plain that Naftogaz would agree to pay Gazprom only $201 (£133) per 1,000 cubic metres of gas, rather than the $250 suggested by Moscow. Gazprom wants a long-term contract that will gradually bring the price Ukraine pays closer to the EU norm. But Ukraine is holding out for cheaper gas and higher transit fees.
In Moscow, where Putin ordered Gazprom to halt all supplies to Europe through Ukraine "in the presence of international observers", the Kremlin accused Kiev of illegal action in shutting down all four transit pipelines and two compressor stations. Gazprom, however, took steps to divert about half its supplies to Europe through pipelines running through Belarus to Poland and to supply Turkey, one of the hardest-hit, via the Blue Stream pipeline.
The number of countries experiencing shortages rose as industrial firms in eastern Europe began shutting down production. Bosnia, Bulgaria, Croatia, the Czech Republic, Greece, Italy, Macedonia, Romania, Serbia, Slovakia - which declared a state of emergency on Tuesday - Slovenia and Turkey all said supplies had halted. Austria, France, Germany, Hungary and Poland also reported substantial drops in supplies.
The angry stand-off between Russia and Ukraine over gas is now seriously disrupting supplies to several European Union countries. Romania has lost 75 per cent of its supply; Bulgaria has only a few days' gas left; Slovakia is on the verge of declaring a state of emergency. The European Commission has waded in with indignant condemnation. But what may look like a replay of what happened three years ago, when Russia drew international condemnation for shutting off gas supplies to Ukraine is in many ways very different; 2009 is not 2006.
For a start, the political element is less evident, and not only because Russia and its state-controlled energy conglomerate, Gazprom, have been more adept in their public relations. This is more of a commercial row between energy companies over payments. Gazprom is demanding money it says it is owed by the Ukrainian state energy company, Naftogaz. Ukraine says it has paid. But the actual sum remains in contention, as does the price of future supplies. Gazprom stopped supplying gas to Ukraine on New Year's Day.
Falling world energy prices make for another distinction between 2009 and 2006. Three years ago, Russia was a major beneficiary of high oil and gas prices, which strengthened the rouble and enabled it to build up a massive budget surplus. The global credit crunch has reversed the process. Commercial self-interest dictates that Gazprom is no longer in a position to grant favours to Ukraine, even in the unlikely event that it wanted to. It needs the money. And Ukraine, as an independent country, will eventually have to pay market prices for Russian energy, like most of Gazprom's other customers.
The international mood has also changed. Internal rivalries have weakened successive Ukrainian governments and the goodwill generated by the Orange revolution is fading. Gazprom may be a difficult negotiating partner, but by obstructing the flow of gas through transit pipelines, Ukraine is holding both the Russian company and Gazprom's other customers to ransom.
Maybe it hopes that a panicked EU will somehow ride to its rescue, perhaps by interceding on its behalf with Gazprom. Given that its battered economy desperately needs the pipeline transit fees, however, its further logic is unclear.
If the rights and wrongs of the dispute look more complicated three years on, however, the lessons to be learnt by Europe's energy-importing countries are, depressingly, the same. Much of the European Union is vulnerable in the energy department. Sources of energy must be diversified - and soon.
While most West European countries and Turkey can resort to pipelines that do not cross Ukraine, many former Soviet-bloc countries are trapped. New pipelines – North Stream under the Baltic, and South Stream under the Black Sea – are under construction, but they will still leave much of Europe vulnerable to the capacity, and caprice, of one supplier: Russia. The security of the Nabucco pipeline, that would bypass Russia through Georgia, was called into question by the past summer's war.
Although not directly affected by the present dispute, Britain must also come to terms with becoming an energy importer again, curb demand and increase storage capacity. Most immediately, however, what is needed is a neutral disputes procedure capable of settling the differences between Russia and Ukraine. Without this, the EU could be contemplating the cycle of intimidation and cut-offs all over again.
With its vast underground storage tanks and network of pipes, valves and tubes, Baumgarten in the flatlands east of Vienna is one of Europe's biggest gas hubs. The first gas to cross the iron curtain was pumped through thousands of miles of pipelines from Siberia and into western Europe 40 years ago, arriving at Baumgarten for resupply across the continent. The hub remains the most important junction today, matching Russia's huge mineral riches to Europe's gargantuan appetite for natural gas. But a new energy revolution is being plotted.
With the Kremlin and the giant Russian gas monopoly, Gazprom, locked in their annual spat with Ukraine, the main transit country for Europe's gas supplies, over prices and politics, Europe is desperately seeking ways to diminish its dependence on the 140bcm (billion cubic metres) of gas it currently imports from Russia. The most favoured, most ambitious and most contentious idea is to build a new pipeline beyond the grip of Gazprom, which controls 90,000 miles of gas delivery systems. Named after a Verdi opera, the Nabucco pipeline is supposed to terminate at Baumgarten, ultimately pumping 31bcm of Caspian gas through Turkey and the Balkans to Austria. "Diversification on the terrestrial route for gas is a must for Europe," says Alexandr Vondra, deputy prime minister of the Czech Republic, which has taken on the EU presidency and sees energy policy as a priority.
The plan, born in 2002, is to thread almost 2,400 miles of pipeline through the narrow geostrategic stretch between Russia and Iran, the two countries with the world's largest reserves of gas, to central Europe. "If we have a dominant company like Gazprom trying to influence all inroads of gas to Europe, we need to develop an alternative to the supply of gas from Russia," says a senior European commission official involved in energy policy. Given the worsening fallout from the Russia-Ukraine dispute as well as the impact of last August's Russia-Georgia war on Caspian energy security, the Europeans are trying to accelerate the Nabucco plans.
"We have good reason to believe that Nabucco will fly," says Reinhard Mitschek, who manages the Nabucco consortium of six national energy companies from the 21st floor of an office block above the Danube in Vienna.
But the problems are formidable. European gas industry sources complain that EU officials are confusing political imperatives with economic, business and energy fundamentals. "This is an attempt at reverse engineering in pipeline development," said a senior industry source. "Usually you find the resource and then you build a pipeline. With Nabucco it's the other way round."
Pierre Noël, energy analyst at the European Council on Foreign Relations, says: "This is a project that does not exist except in the minds of Brussels bureaucrats. They think you can build a pipeline and then the gas will flow. It's simply not credible."
Brussels has already spent millions on feasibility studies for a pipeline that will consume more than 2m tonnes of steel and comprise some 220,000 lengths of pipe from Turkey's eastern border through Bulgaria, Romania, and Hungary into Baumgarten on Austria's border with Slovakia.The cost is €8bn (£7.2bn) and rising. Construction was supposed to start last year, then this year, now next year.
Last summer Mitschek ordered a survey of gas shippers and said the results showed interest in pumping 16bcm through Nabucco, half the total capacity but ample to get the pipeline operating.
The industry source said there was nowhere near enough to make Nabucco viable. "The most important issue regarding this project is to obtain enough gas," the Turkish president, Abdullah Gül, said last month. The first target for gas to fill the pipeline is Azerbaijan, whose Caspian field Shah Deniz II should come onstream around 2013, when Nabucco is due to start pumping. "This gas is expected from Azerbaijan," says Mitschek of the 8bcm, or quarter of the pipeline's capacity, needed to start Nabucco operations. But Gazprom is competing fiercely for the Azerbaijani prize in a bidding war with the Europeans, offering above- market prices for the gas while the Kremlin dangles the political carrot of arranging the return of the disputed enclave of Nagorno-Karabakh to Baku's control.
"The Russians have offered a deal," says Elmar Mammadyarov, Azerbaijan's foreign minister. "But there are different options on the table. At the end of the story, it's our gas."
A recent western audit of Turkmenistan's gas reserves cheered officials in Brussels by confirming a doubling of the known resources. But experts caution that it will be 20 years before sufficient Turkmen gas can be pumped for Europe to evade Gazprom's control. Similar calculations apply to aims of filling Nabucco with gas from Iraq or Iran, were there to be major political change in Tehran. Compounding the problems is Turkey and its worsening relationship with the EU. Well over half the proposed pipeline is to be located in Turkey.
Brussels is attempting to negotiate an agreement making Turkey the main transit country for Caspian gas to Europe. The Turks are insisting on 15% of the gas at discounted prices, a demand that would wreck Nabucco financially, say officials in Brussels.
Hopes of big cuts in household energy bills faded yesterday as traders drove up UK prices by exporting gas to fill a growing shortage across Europe.
Despite freezing temperatures and rising demand in Britain, traders switched from importing to exporting gas through an interconnector pipeline to continental Europe as a growing row between Russia and Ukraine left many countries short of supplies.
British wholesale prices have leapt in recent days due to the crisis, leading to warnings that UK householders could be denied long-awaited cuts in fuel prices. The price of gas hit 73p a therm – up 26% in three days.
Government sources warned UK energy companies not to use the Ukraine crisis as an excuse to delay passing on the benefits of otherwise lower world energy prices. One senior Whitehall figure said: "We would expect the energy companies to be responsible and not use this dispute as an excuse to hold off on the price reductions they have talked about which customers are expecting in the spring."
British Gas and others indicated late last year they would cut domestic gas bills early this year amid growing anger from consumers, but made clear this would only happen if there was a sustained fall in the price of wholesale power.
Hopes of that fall in domestic gas bills are now dwindling, said energy consultants Inenco, who count Marks & Spencer and John Lewis among their customers.
"We are not experiencing supply shortfalls in the UK but the markets are already responding [with higher prices]. With future dependence on imported gas, Britain needs to make energy security a key priority or risk being held to ransom," said Ian Parrett of Inenco.
In an interview on BBC Radio 4's Today programme this morning, Ed Miliband, the energy secretary, said it was important for the crisis between Russia and the Ukraine to be resolved "as quickly as possible", but he played down the impact it was having on British consumers.
"The point I would make is that a small proportion of gas is going through the interconnector to continental Europe because prices have gone up, but in terms of the companies that have ownership in Britain, they have legal obligations that will have to be met, and are being met, to supply UK customers," he said.
"So I don't think people should be alarmed about this dispute for whether they are going to be able to use their gas in the months ahead."
But the crisis will reignite concerns that the UK has left itself open to exploitation by foreign companies who came in and bought up major UK utilities, leaving British Gas as one of the few locally owned entities. EDF of France and E.ON and RWE of Germany are among the continental groups that dominate the sector.
There was particular concern that the huge foreign-owned utilities that dominate power supply in the UK are putting their continental customers ahead of UK energy users, although they denied this.
These companies – some of which have part-government ownership – have used a free market to buy British assets in a way that is considered unlikely to occur on mainland Europe. They are also able to use the more liberalised gas market to fill up their storage facilities during the summer and autumn.
"Even in winter, if they can get hold of UK gas via the interconnector they will use that instead of dipping into their storage facilities. By contrast, UK players can't access gas from the European market as there is no liquid market to buy from ... Also there is no third party access to European gas storage facilities, again in contrast to the UK," said one frustrated British gas trader.
E.ON, which has nearly 3 million gas customers in Britain and is a part-owner of the interconnector pipeline, confirmed that the fixed link had turned from being a net importer to net exporter of gas, because of shortages throughout parts of continental Europe.
The company admitted its gas traders might themselves be exporting gas from the UK but this was not at the expense of the UK consumer or unexpected. "It's a fairly normal time in the UK ... Southern Germany has got a problem and is being largely supplied by northern Germany, but it's certainly possible our traders [are exporting from Britain]. They are always looking for opportunities. But it is only if the situation goes completely pear-shaped that France and Germany will come looking for Norwegian gas in Britain," said a spokesman for E.ON UK.
The National Grid, which operates the gas and electricity transmission network in Britain, confirmed that 10m cubic metres of gas a day were moving though the interconnector between the UK and Belgium. But he said that this was more than made up for by imports from the continent via the BBL pipeline and Norwegian energy arriving through the Langeled link.
Mounting concerns about Britain's energy security came after Russia finally halted all shipments to Ukraine, accusing its neighbour of holding up all transit gas bound for continental Europe.
The European commission described the behaviour of Russia and Ukraine as "completely unacceptable", while the problems rekindled a long-running debate in the UK about the vulnerability of the country now that North Sea gas and oil supplies are running out fast.
John Cridland, the deputy director-general of the CBI, said that the disruption underlined the importance of the British government taking urgent action on a wider UK energy agenda.
"Ministers now need to agree an early deadline for publishing national planning statements for nuclear power, gas storage and offshore wind and tidal power as a matter of urgency so the UK can move towards achieving much greater energy security and reducing our dependence on imported gas," he said.
And David Porter, the chief executive of the Association of Electricity Producers, said it underlined the need for new coal-fired stations to keep the lights on. "New coal-fired stations can be built much sooner than new nuclear and they can help us to avoid power shortages as our ageing power stations close in the next few years," he said.
In his interview this morning, Miliband said that Britain only got 2% of its gas from Russia. "We have got a diverse range of sources where our gas comes from, which is the most important thing this dispute teaches us for all countries," he said.
Miliband said that, although the majority of Britain's gas still came from the North Sea, Britain also had long-term supply contracts with countries such as Norway (which now supplies about 20% of Britain's gas), and some storage capacity.
He acknowledged that more storage capacity would be needed in the future. But he said there were 18 different projects due to be built between now and 2020. "I feel confident that we are making the right decisions," he said.
The British government must declare a national need for new nuclear power stations by the end of this year if EDF is to launch its first new generation reactor by 2017, according to senior executives of the French energy group.
EDF on Monday finalised its £12.5bn takeover of British Energy, operator of 10 UK nuclear power plants. The group plans to build four of the French-designed 1,600MW EPR reactors on British Energy sites.
However, Pierre Gadonneix, EDF chief executive, said Britain still needed to develop a “fluent” regulatory environment for the new generation technology if it was to have the new nuclear capacity needed to address environmental and capacity concerns.
“Clearly the British government and many stakeholders are aware of the huge need for nuclear development as soon as possible,” he said in an interview with the Financial Times. “If we want to meet the 2017 challenge for the first EPR, we must find ways to make the process as fluent as possible . . . That will take time and that will cost.”
The UK government backed the EDF takeover of British Energy in the hopes that the experienced operator would deliver quickly a new wave of nuclear power stations.
However, the first EPR being built outside France – by fellow French group Areva in Finland – has run into serious delays, in part due to regulatory differences.
Mr Gadonneix was speaking as EDF said its offer for British Energy had become unconditional.
He said EDF was open to other companies taking stakes in its new nuclear power stations in the UK, along the lines of Enel of Italy’s 12.5 per cent stake in the new reactor being built at Flamanville in northern France.
EDF is likely to want other companies involved to help meet the huge cost of its investment plans. It is in talks with Centrica, the owner of British Gas, to take a 25 per cent stake in British Energy for an equivalent price to its bid, making the stake worth £3.1bn. It is also discussing the possibility of a stake in future nuclear reactors.
Acquiring more generation capacity is an important strategic objective for Centrica to reduce its vulnerability to commodity price fluctuations.
However, if it wants to take a stake in any new developments, it will have to put up further funds to meet its share of the investment cost.
“Centrica can be a partner, but it is not the only one for new nuclear,” Mr Gadonneix said. He suggested that the Centrica deal might be completed within two or three months.
Low oil prices and the credit crunch are threatening to stall the green revolution. The value of crude has dropped from a summer high of nearly $150 a barrel to below $40, taking the wind out of the sails of turbine manufacturers and others trying to build low-carbon alternatives.
Jeremy Leggett, founder and executive chairman of Solarcentury, says: "Talk of the death of renewables is premature but clearly big solar farms and wind projects are being cancelled. Everything is suffering in the current climate but its my contention that the low oil price is a temporary thing and the growth of renewables will resume."
Michael Liebreich, chief executive of information provider New Energy Finance, says his leading index of clean-technology companies has fallen from a high of 450 points 12 months ago to 175 points, hit by a triple whammy of lower oil prices, higher costs of capital and fear of more speculative start-up businesses.
But he too is confident that the sector can bounce back. "There was no doubt that there was a certain amount of irrational exuberance over the low-carbon economy. No industry in history has kept up the kind of 40% compound growth rates being ascribed to clean tech so share prices had run up too far and it was time for a correction."
Clean-tech and renewables stocks have been struggling with more than just sentiment. Indian-based wind turbine manufacturer Suzlon Energy, which has seen its share price plunge by 90% this year, has also been hit by malfunctions and the kind of teething problems it says is are inevitable with new types of technology.
Wind developers in the US have been cutting back in the face of tough new conditions. FPL Group, the US's largest wind-power operator, is cutting its spending this year by nearly a quarter to $5.3bn (£3.7bn) and new wind-power generation from 1,500 to 1,100 megawatts.
Confidence in the sector has also been rattled by T Boone Pickens, a veteran oil man who delighted environmentalists with a very public conversion when he promised to build the world's largest wind farm in Texas. He slammed on the brakes in November on the basis that lower oil prices had changed the economics of a scheme that would have powered 1.3m homes.
However the US wind sector has generally been faring better than the British one, thanks to tax breaks. Shell and BP have made it clear they are no longer interested in pursuing UK farms when the investment numbers stack up much better across the Atlantic.
The decision by Shell to pull out of the London Array wind farm was a particular blow to British confidence. The project has been billed as the biggest offshore scheme of its kind in the world but the oil company said the margins were too thin, leaving E.ON of Germany and Dong Energy of Denmark to go it alone.
Anton Milner, the chief executive of Q-Cells, the world's largest manufacturer of solar cells, cut earnings forecasts recently after being hit by what he described as a "flood" of cancellations from developers of solar-power projects struggling to raise finance. The US manufacturer Evergreen Solar has since delayed an $800m new factory in Asia that would have manufactured enough solar cells to power a city of 500,000 people.
But most industry figures are convinced that though the threat of global recession is slowing down the industry, the future remains bright enough, especially with a new figure taking over the White House. Liebreich says his clean-tech index has seen an "Obama bounce", rising from a low of 130 to 175 on the back of optimism about the incoming president's policies.
A raft of radical political appointments – such as Nobel physics laureate Steven Chu as energy secretary – has convinced environmentalists that Barack Obama is serious about his stated aim of hastening progress towards a low-carbon economy with a green New Deal that will reduce his country's dependence on imported oil.
A quarterly review of climate change-related business opportunities just published by analysts at HSBC says governments are increasingly active. "The engagement of governments has grown globally," they say. "Across the political spectrum there is now more recognition that climate change is a genuine long-term global issue with real growth potential."
Martin Wright, managing director of Marine Current Turbines, says no one should expect oil and gas prices to stay low. "Vladimir Putin has already said the era of cheap gas is over and no one knows when peak oil really will come about. So we can expect enormous price volatility, which all points to the need for Britain to develop an independent low-carbon alternative."
Government consultants have been accused of miscalculating the costs of a project to generate vast amounts of green electricity in the Severn estuary, promoting a 10 mile-long tidal barrier strongly backed by ministers in preference to a scheme that engineers and environmentalists say is far less damaging.
The US engineering firm Parsons Brinckerhoff has been hired by the Department of Energy and Climate Change (Decc) to assess technologies that could meet, from the Severn estuary, up to 7% of the electricity consumption of England and Wales. Its feasibility study for the estuary, which has the second highest tidal range in the world, has been sent to ministers, who will soon announce a shortlist of potential schemes based on the assessment.
Finding a way to harness the power of the Severn's tides is important as it would represent a big step towards Britain's target of generating 35% of all electricity from renewable sources by 2020.
Sources in Decc say the firm favourite is the 10-mile barrier, which would span the entire estuary and is costed at about £14bn. Parsons Brinckerhoff (PB) said the barrier could generate between 5GW and 8.6GW of renewable electricity at a cost of about 3p/kWh, but that it would impede shipping and lead to permanent flooding over more than 100 miles of shoreline.
Ministers have already called the scheme "visionary" and a "trailblazer for clean, green energy".
But correspondence seen by the Guardian shows that a row erupted between PB and a company promoting a scheme that environmental groups and other engineers claim would be far less damaging, as well as cheaper and more efficient.
Tidal Electric wants to generate electricity by using tidal lagoons built on the estuary floor from rock. Up to 13 lagoons would be dotted around the Severn estuary, not across it. These would trap water at high tide and release it later through electricity-generating turbines.
Studies carried out by the engineers AS Atkins, for Tidal Electric, have suggested that the lagoons could generate twice as much power, per square mile impounded, than the barrage, and therefore generate about 25-40% more energy without damaging the shoreline.
However, the plan sent by PB to ministers says the tidal lagoon option would be eight times more expensive than the barrage scheme and would not generate as much power.
But Peter Ullman, chief executive of Tidal Electric, said: "PB has made huge miscalculations. They have submitted [to ministers] cost-numbers on power from tidal lagoons that are roughly 800% higher than all the previous studies of tidal lagoon power conducted by UK engineering giant WS Atkins and corroborated by AEA Technology, Ofgem and Rothschild Bank. They have arrived at their extraordinarily high numbers by ignoring the technology developer's design parameters and introducing their own design."
One key issue is that Tidal Electric plans to site the lagoons in shallow water, while PB assumes they would be built – at a higher cost – in deeper water.
Tidal Electric is backed by many leading environment groups, including the Royal Society for the Protection of Birds, and Friends of the Earth, as well as a vocal west country lobby, which believes a barrage would be ecologically and socially disastrous. According to the Bristol-based group Stop the Barrage Now a barrage would add to local flooding, reduce fish stocks, damage bird life and destroy the Severn bore, as well as ruin mudflats across an area of more than 77 sq miles. They say a barrage would impede shipping, adversely affecting ports such as Bristol, Sharpness, Gloucester and Cardiff, and put at risk thousands of jobs.
A PB spokesman said: "We are unable to comment on Mr Ullman's complaint, but it is important to stress that during the selection process all options have been technically assessed to a common engineering and cost baseline.
"The same technical and energy yield approach has been applied to all options and the process and outcomes have been subject to peer review. The selection process is reviewed by an independent panel of experts appointed by Decc."
In correspondence with Tidal Electric, seen by the Guardian, PB executives note that the consultation will continue: "There [will be] ample opportunity for dialogue to continue even though the public consultation documents are in the final stages of preparation. The public consultation process provides you with the opportunity to formally respond to the consultation documents, which will include our appraisal of the long-listed schemes. If the offshore lagoon concept is shortlisted, specific optimisation of proposals will be carried out in the next phase, which will require further dialogue."
A range of barrage studies were made between 1974 and 1987 at a cost of £65m, out of which a specific Severn barrage scheme was drawn up by the Severn Tidal Power Group. A revised report was published in 2002 but all the plans were rejected at the time as being too expensive or too ecologically damaging.
Alistair Darling warned on Tuesday that Britain was “far from through” the recession, in a clear signal that he will have to abandon the government’s forecast that the recovery would start in the second half of this year.
In an interview with the Financial Times, the chancellor repeatedly used the word “difficult” to describe the outlook, after economic data suggested his forecasts last November were over-optimistic and will have to be revised in this spring’s Budget.
“In the current climate, no responsible finance minister could say that’s the job done, far from it,” Mr Darling said. “We are far from through this.”
November’s forecasts said Britain should now be at the midpoint of a one-year recession. Mr Darling said those projections were “based on the evidence we had at the time”.
He added: “This year is going to be difficult. There are going to be some tough calls.”
The Bank of England is on Thursday expected to respond to the slump by cutting interest rates to their lowest point for 300 years, which could provoke tension with the Treasury and ultimately threaten its independence.
Mr Darling said that if rates fell close to zero, the central bank and Treasury would have to work “hand in hand”, since any operations by the Bank of England to print money would have to be authorised by him. His stance will disappoint many at the central bank who wanted to be given authority by the Treasury to operate quantitative easing – creating money to buy assets – within parameters agreed in advance.
Mr Darling insisted the government’s £20bn fiscal stimulus was the right way to help the economy and the Conservative plan to cut public spending by £5bn next year was “utter madness”.
He would look to the Budget to “see what else I can do to support the economy”, suggesting he would consider measures that added to Britain’s projected £118bn deficit next financial year.
The chancellor expects to announce a package of measures to support bank lending to business within the next few weeks.
He will on Wednesday call for new measures to toughen global financial regulation, warning that the world’s capital markets would remain frozen and protectionism could be fuelled unless further action is taken.
After years of championing light-touch regulation, the UK will use its chairmanship of the G20 group of leading economies and developing nations to promote more active regulation.
Mr Darling will write to G20 colleagues on Wednesday proposing measures, ahead of a London summit in April, including giving regulators wider powers to ban banks from using business models that cause systemic risk. He will propose liquidity rules and the setting of consumer protection standards for groups wanting to operate across borders.
The Bank of England today ordered another half-point cut in interest rates to just 1.5 per cent, the lowest in 314 years, as it kept up its aggressive campaign to breathe life into the stalled economy.
The Bank’s further move came hard on the heels of cuts of 2.5 percentage points over the past two months alone.
But the move will disappoint struggling businesses and fearful workers and consumers, who were hoping for a more radical cut by another full percentage point or more.
The latest cut came amid soaring fears over Britain’s rapidly worsening prospects following a deluge of dire economic news and a mounting toll of job losses.
Clearly, simply, and starkly, the Chancellor presented the most up-to-date picture of the country's economic plight
Warnings have been voiced in recent days that the economy will suffer its worst year since 1946 and shrink by more than 2.5 per cent over 2009.
In its statement today, the Bank warned that the pace of contraction in the economy during the past quarter would prove more severe than the already steep 0.5 per cent decline suffered in the previous three months, and that "output is likely to continue to fall sharply during the first part of the year".
In a bleak assessment, the Bank also highlighted signs that consumer spending was faltering, and a worsening outlook for business investment and housebuilding, as well as the continued lending drought facing both household and corporate borrowers. It again emphasised that "further measures" were likely to be needed to boost the flow of lending.
The Bank's gloomy analysis came after Alistair Darling, the Chancellor, yesterday admitted that Britain was “far from through” the recession. He conceded that his forecast for the economy to shrink by no more than 1.25 per cent in 2009 was likely to prove too optimistic.
“This year is going to difficult. There are going to be some tough calls,” the Chancellor said.
Lord Mandelson, the Business Secretary, is also to warn today that the greater danger to the outlook comes not from inflation but from deflation — sustained falls in prices that would suck the lifeblood of demand out of the economy.
With anxieties growing that interest rates are proving ineffective in combating the deepening recession, the Treasury and Bank of England are examining ground-breaking measures to rekindle growth.
Moves being considered range from a strategy of “quantitative easing”, involving US-style moves to buy-up debt from banks to increase the flow of commercial lending and cut its cost, to a second recapitalisation of the banking system that could see billions more injected into leading high street banks.
With interest rates already at unprecedented lows, and tipped to fall to zero, or close to it, within a few months, a key worry for officials is that the Bank is running out of firepower, making the need for alternative weapons more pressing.
That concern may have been one factor that persuaded the Bank’s nine-member Monetary Policy Committee to conserve some of its rates ammunition for later in the year.
The noon verdict from the MPC that rates should be reduced by a half-point came after a fresh spate of job losses and company collapses across the nation.
With consumer spending faltering, Marks & Spencer confirmed that it is axing 1,200 jobs and closing 27 stores. Another 1,000 jobs are under threat at Cattle’s, a finance company, while Barclays is cutting 400 IT jobs. Viyella, the fashion business, also collapsed into administration this week putting more jobs in jeopardy.
City economists predict that unemployment, which is already rising at the faster than in the early Nineties recession, is set to top three million on the Government’s Labour Force Survey figures before the end of the year.
The UK motor industry will build nearly one in five fewer cars next year, sending production down to the lowest level for more than 20 years, according to the latest estimates.
Overall, the UK industry made 1.62 million vehicles in 2008, nearly 6 per cent fewer than the previous year. But 2009 will see production fall by another 18.9 per cent to just 1.32 million – the fewest since 1986, preliminary forecasts from PricewaterhouseCoopers indicate.
Motor manufacturers and related industries – which between them employ nearly one million people – are already calling on the Government to help ease the dual crises of reduced consumer spending and scanty access to credit. Overall production was down by 33.3 per cent in November alone, big names like Jaguar Land-Rover and the dealership Inchcape are cutting staff, and all major manufacturers have instituted unusually long periods of downtime over Christmas. But far worse is to come, says PwC. "We have only had two quarters of declining sales so far, compared with 11 consecutive quarters in the last recession – so we are really only at the start," Matthew Alabaster, a director, said. "It is carnage."
Only Turkey and Mexico are expected to see greater proportional falls in production than the UK next year, but the picture is not rosy anywhere. Germany will make 11 per cent fewer cars, France 12 per cent fewer, the US more than 15 per cent fewer. The European sector as a whole will see a 12 per cent contraction to 16 million – a 12-year low. Asia-Pacific will drop by 6.5 per cent, eastern Europe by 10 per cent, North America by 17 per cent to 10.5 million, the continent's worst result since the early 1980s.
Even the emerging markets are looking shakey. China has gone from double-digit growth in 2007, to 7.4 per cent growth this year and just 1.5 per cent predicted for 2009. India will go from 10 per cent growth this year to a 3 per cent contraction next.
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