ODAC Newsletter - 27 March 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.
The oil price remained steady this week at around $53 amid conflicting data on the economy. One set of figures showed that during the 4th quarter of 2008 the US economy shrank at its fastest rate in twenty-five years, but another suggested US demand is showing some signs of recovery.
The UK economy had another torrid week. Soaring public debt led to a surprise statement on Tuesday from Mervyn King, Governor of the Bank of England, that Britain could not afford another huge fiscal stimulus package. As if to confirm it, the Debt Management Office announced it had not been able to sell all the gilts (government bonds) in its latest issue.
The low oil price and the financial crunch continues to have a terrible impact on Britain’s plans for 35% renewable electricity by 2020. In the latest blow, this week Iberdrola Renewables cut investment in the UK by more than 40%. Meanwhile Steve Holliday, chief executive of National Grid, showed frustration this week at a lack of strategic planning by the government, and warned that an increase in subsidies and greater regulation would be needed to meet the target. Former BP boss Lord Browne also weighed in, pleading for greater state intervention in energy markets to make renewables viable. Time is running out to make meaningful changes, and unfortunately, so is the money.
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Crude oil rose on signs that fuel demand in the U.S., the world’s largest energy consumer, may be coming out of a slump.
U.S. fuel consumption rose 2.2 percent to 19.2 million barrels a day last week, and gasoline demand gained 1.6 percent to 9.1 million barrels a day, according to the Energy Department. U.S. durable goods orders increased 3.4 percent last month, a Commerce Department report showed yesterday.
“Sentiment in the oil market has improved considerably in recent weeks, with the rise above $50 confirmation a bottom has been found,” said Carsten Fritsch, an analyst with Commerzbank AG in Frankfurt. “Durable goods data was better than expected, giving some hope about the future economy and a recovery of oil demand.”
Crude oil for May delivery gained as much as 95 cents, or 1.8 percent, to $53.72 a barrel on the New York Mercantile Exchange. It was at $53.57 a barrel at 10:14 a.m. London time.
Prices are up 20 percent this year on expectations that supply cuts by the Organization of Petroleum Exporting Countries would drain the crude glut created as the economic slump slashed demand. Monetary and fiscal policy to revive economic growth in the U.S. and other oil consumers may also add to demand.
Still, stockpiles in the U.S. continue to rise. Crude supplies rose 3.3 million barrels to 356.6 million last week, the Energy Department said yesterday. Inventories were forecast to increase by 1.1 million barrels, according to a Bloomberg News survey. Total daily fuel demand averaged over the past four weeks was 19.1 million barrels, down 3.2 percent from a year earlier.
The inventory gain was the 22nd in 26 weeks. The increase left supplies 13 percent higher than the five-year average for the period, the department said. Stockpiles gained 3.5 million barrels in the U.S. Gulf Coast region, known as PADD 3, where the majority of refining capacity is located.
“Usually a build like that in PADD 3 means the refineries aren’t taking the crude,” said Clarence Chu, a trader at options dealer Hudson Capital Energy in Singapore. “Now is the time when the refineries are shut down for maintenance.”
Other plants are closing as demand for fuels has declined. Refineries operated at 82 percent of capacity, down 0.1 percentage point from the prior week, the Energy Department said.
Total SA, Europe’s third-largest oil company, is shutting output at its Port Arthur, Texas, refinery in response to weakening demand. The company said in a filing with the Texas Department of Environmental Quality March 24 that it began closing units at the facility.
Production at the facility, which has the capacity to process 240,000 barrels of oil a day, will be stopped for weeks, according to United Steelworkers union members who work at the plant.
Gasoline stockpiles dropped 1.14 million barrels to 214.6 million last week. The decline left inventories 0.4 percent lower than the five-year average for the week, the department said. A 650,000-barrel drop was forecast, according to the median of 14 analyst responses in a Bloomberg News survey.
Distillate supplies declined 1.58 million barrels to 143.9 million, leaving stockpiles 25 percent above the five-year average for the period. A 100,000-barrel drop was forecast.
Brent crude oil for May settlement rose as much as $1.20, or 2.3 percent, to $52.95 a barrel, on London’s ICE Futures Europe exchange. It was at $52.56 a barrel at 9:33 a.m. London time.
Suncor Energy of Canada is to buy rival Petro-Canada for C$19.6bn ($15.9bn), in an agreed all-share deal that will create North America’s fifth biggest oil and gas producer and accelerate consolidation in the Alberta oil sands.
The largest deal in the oil and gas industry since 2006 comes amid troubled times for operators in bitumen-like oil sands, which cover an area the size of Florida and contain the world’s second-biggest oil reserves after Saudi Arabia.
Industry estimates suggest existing projects need an oil price of about $40 a barrel to cover their costs, but a new project with substantial investment could need close to $100 a barrel to be commercially viable.
Besides the difficulty of extracting the oil, labour and equipment costs soared during the energy boom. Numerous projects have been delayed or shelved since the collapse in the oil price.
Suncor’s shareholders will own about 60 per cent of the merged company, with Petro-Canada’s holding 40 per cent. Suncor’s offer represents a premium of about 25 per cent on Petro-Canada’s recent share price.
Rick George, Suncor’s chief executive, said on Monday that the combined company “will be very focused in Canada, very focused on oil sands”. Much of its oil sands production will be channelled through its five refineries.
Mr George added that the enlarged Suncor would be in a strong position to match bigger rivals, such as Exxon and Royal Dutch Shell, in continuing to invest during the downturn in commodity prices.
Suncor is the second biggest oil sands producer. Petro-Canada is more diversified with stakes in several oil sands projects, more than 1,300 retail outlets, and operations off the east coast of Canada, in the North Sea, Libya, Syria and the Caribbean.
Suncor and Petro-Canada said that their deal would cut C$300m a year in operating outlays, and save C$1bn in capital budgets.
CIBC World Markets and Morgan Stanley acted as financial advisers to Suncor. Petro-Canada retained RBC Capital Markets and Deutsche Bank.
Venezuelan President Hugo Chavez has unveiled a series of measures to offset falling oil revenues that account for about 50% of the national budget.
He proposed to cut the 2009 budget by 6.7% and increase sales taxes.
Mr Chavez also pledged salary cuts for senior public officials, but a 20% rise in the minimum wage.
His announcement came shortly after the government had sent army to take control of the country's key airports and sea ports.
The government says the move - which was rubber-stamped by parliament a week ago - centralises the running of the country's main transport hubs.
Opponents say the move is unconstitutional, accusing Mr Chavez of consolidating power.
Government spending cuts
In a televised address on Saturday, President Chavez said that the revised 2009 budget would be based on oil prices at $40 (£28) a barrel, not a $60-a-barrel forecast when the budget was drafted.
Venezuelan military seizes ports
"The budget is reduced by 6.7%... which is 11bn Bolivars ($5bn; £3.5bn)," Mr Chavez said.
He said the government now expected an income of about $72bn (£50bn).
Mr Chavez also pledged to trim salaries for high-level public officials to help balance the books.
"We are preparing a decree to eliminate luxury costs - the acquiring of executive vehicles, redecorating, real estate, new headquarters, promotional material and unnecessary publicity, corporate gifts."
But he vowed to raise the minimum wage by 20%, as the collapse in oil prices threatened his high spending social programmes that had made him popular amid the poor majority.
President Chavez said the economy was in good shape to weather the storm it was facing.
But one opposition leader called the package of reforms a "smokescreen", designed to hide deeper problems in Venezuela's oil-dependent economy.
Mr Chavez's proposals are expected to be easily approved by the congress, which is dominated by presidential loyalists.
MOSCOW - On March 23, Ukraine and the European Union signed a declaration on the modernization of Ukraine's gas transportation system. The choice of a cheaper route for the transit of Russian natural gas to Europe via Ukraine, instead of the planned Nabucco pipeline to deliver Caspian gas bypassing Russia, looks like a wise decision.
However, Russia insists that only a trilateral agreement between the EU, Ukraine and Russia will ensure the project's success.
Energy giant Gazprom is supplying 26% of Europe's gas requirements, 20% of them across Ukraine, whose gas transit system can pump 120-140 billion cubic meters annually.
Ukrainian Prime Minister Yulia Tymoshenko presented a master plan for modernizing the system at an investment conference in Brussels. According to it, the system's throughput capacity can be increased by 60 billion cu m, but Ukraine needs 5.5 billion euros ($7.5 billion) from the EU to implement the project.
The EU is prepared to invest 2.5 billion euros in the Ukrainian gas transit system, which was built during the Soviet period 40 years ago, by the end of 2015. Europe believes that money will be enough to maintain the system's capacity at its current level.
Under the agreements signed in Brussels, Ukraine must create a transparent gas market, including by ensuring the operators of the Russian gas transit to Europe an opportunity to work commercially.
The European Bank for Reconstruction and Development, the World Bank and the European Investment Bank have assured Ukraine that they will lend it money for modernizing the gas transportation system, but did not specify the terms.
It is difficult to say if these agreements are in line with the Russian-Ukrainian contracts on gas supplies to Ukraine and gas transit to Europe, signed until the end of 2019. It was thanks to these contracts that the Russian-Ukrainian gas conflict early this year, which kept a large part of Europe without gas for two weeks, was resolved.
Russian Prime Minister Vladimir Putin said in the evening on March 23 that it was senseless to try to negotiate Russian gas supplies without Russia. He said: "Have they consulted with us, do they know if we can transport such amounts, and if we are ready to do it?"
Tymoshenko tried to defuse tensions the same day. "Like the EU, Ukraine intends to attract Russia as a partner to a major program of modernization of the Ukrainian gas transportation system," she said.
If the EU, Ukraine and Russia negotiate the problem and sign a trilateral gas treaty, this will greatly change the EU's energy policy.
At the height of the Russian-Ukrainian gas conflict in January 2009, Europe decided to press for energy security by accelerating the economically questionable Nabucco project bypassing Russia, planned to deliver natural gas from the Caspian fields to Austria across Turkey.
The EU pledge to make multibillion investments in the modernization of Ukraine's gas transit system signifies that the vector of the EU's energy policy has been redirected to the tried and tested route - from Russia to the EU across Ukraine.
The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
The first giant tanker carrying super-cooled gas from the Middle East to one of two new terminals in Pembrokeshire has arrived in port.
Once fully operational, the liquefied natural gas plants at Milford Haven will be capable of meeting up to 25% of the UK's current gas requirements.
The Tembek began its berthing process at the South Hook terminal at 1500 GMT and finally docked three hours later.
Protesters who have fought the £13bn projects have been at the site all day.
Milford Haven Port Authority said it could handle LNG shipping safely.
The tanker, which has sailed from Qatar, had been moored off Pembrokeshire waiting for the tide to allow it to berth at the newly built South Hook deep water terminal.
It is the largest LNG plant in Europe and is a joint venture between Qatar Petroleum, ExxonMobil and Total.
Faisal Al-Suwaidi, chairman of Qatargas, said the arrival of the first cargo at South Hook was "a significant milestone" in the project.
UK Energy Secretary Ed Miliband said: "The arrival of the first shipment of gas from Qatar to Milford Haven's new import terminal at South Hook opens up yet another source of gas to UK homes and businesses, and will help boost our energy security, as North Sea supplies decline."
Meanwhile, Ted Sangster, Chief Executive of Milford Haven Port Authority, said the port's ability to handle LNG would help them in their aim to become the "most highly regarded port in the country".
"LNG's arrival also means the eyes of the world will be upon us, helping to attract the interest of other commercial operators which which will present us with further opportunities to create additional revenue," he said.
LNG is natural gas which has been converted to a liquid by cooling it to a temperature of -160°C.
In its liquid form, it occupies much less space than gas, making it easier and more cost-effective to transport.
It will be turned back into gas at the terminals and pumped into the UK network along a specially constructed pipeline running from Milford to Gloucestershire.
South Hook is the larger of two terminals built at the port.
The other, Dragon LNG, a partnership between Malaysia's state oil firm Petronas, BG and the Netherland's 4Gas, is expected to become operational later in the year.
The companies say LNG imports will increase the UK's security and diversity of gas supply while helping to ensure that natural gas remains a competitive source of energy.
The plants have been opposed by campaigners since they were first announced six years ago.
Gordon Main, founder of Safe Haven, said there were concerns that sufficient risk assessments had not been carried out into the possibility of a collision or major incident at the port.
Members of the group were expected to sound a World War II air raid siren from an island at the entrance to the waterway.
The tanker is longer than the Eiffel tower
"We will be sounding it from Stack Rock fort when the first LNG tanker appears at the heads on Friday," he said.
"This will be a notice to all who live along the waterway that LNG is coming into Milford Haven."
Safe Haven commissioned its own report which it says shows "that a proper risk assessment of LNG cargo spills to the onshore population" has not been carried out.
Milford Haven Port Authority said a large number of reports and risk assessments had been undertaken.
"We are confident that we can handle LNG shipping safely and efficiently along with all other users of the port," it said.
Britain’s ambition to become a global leader in renewable energy suffered a major setback last night when the world’s biggest investor in wind power said that it was slashing its investment programme.
The announcement comes less than two months after ministers backed a string of huge gas-fired power stations, prompting concern that the Government cannot fulfil its promise of a green energy revolution.
Iberdrola Renewables’ decision to cut its investment in Britain by more than 40 per cent, or £300 million — enough to build a wind farm powering 200,000 homes — is the latest obstacle to Gordon Brown’s target of generating 35 per cent of the country’s electricity from renewable sources by 2020. Lifting it to that level from the current 5 per cent would cost an estimated £100 billion. But wind energy investments have collapsed as funding dries up in the credit crunch and the price of oil, gas and coal has fallen. Delays obtaining access to the national grid and planning permission have compounded the industry’s woes.
Shell and BP have shelved or pulled out of renewable energy projects, including a £3 billion project for 341 turbines in the Thames Estuary, and questions have been raised over the future of npower’s £2.2 billion Gwint y Mor farm off the Welsh coast.
“We are way off the pace,” Jonathon Porritt, the head of the Sustainable Development Commission, said. “The UK has talked about this for years, but the Government now has very little time to get this together. People just do not consider the UK to be a good place to invest in renewables.” Duncan Ayling, of the British Wind Energy Association, said: “We need strategic leadership from the highest levels . . . We are only going to do this if the Government is brave enough to tackle these problems head on.” He called for the formation of a Cabinet-level sub-committee to lead the industry’s development.
A recently approved gas-fired station in Pembroke will be the largest in Britain, producing 2,000 megawatts, two thirds of the total produced by all of the country’s wind turbines.
Xabier Viteri, chief of Iberdrola Renewables, whose Spanish parent owns ScottishPower, blamed the economic crisis for the move but added that problems in Britain could force his company to consider investing elsewhere.
The latest announcement will come as an embarrassment to Ed Miliband, the Energy Secretary, who this week described opposition to wind farms as “socially unacceptable . . . like not wearing your seatbelt or driving past a zebra crossing”.
Britain must revert to greater state control of energy markets to hit ambitious targets on renewable energy and climate change, according to the former head of BP.
Lord Browne of Madingley warns that market mechanisms are failing to deliver the necessary growth in clean energy. Crucial offshore wind projects could be cancelled unless there is an urgent rethink of energy policy, he says.
In a speech tonight at Cardiff University, Browne will say: "Competition has been the guiding star of UK energy policy since the 1980s and it worked well while there was a surplus of energy infrastructure capacity. But price competition is now failing to deliver the new, more diversified infrastructure that we urgently need to bolster energy security and meet our climate change targets.
"I remain convinced that the market is the most effective delivery unit available to society. But the market will need a new strategic direction and a new framework of rules, laid down by government."
Under EU efforts to combat global warming, Britain must generate 15% of its energy from renewable sources by 2020. The bulk of this is expected to be met by the electricity sector, and ministers have announced plans to build thousands of offshore wind turbines off the UK coast.
In an interview with the Guardian in advance of the speech, Browne, president of the Royal Academy of Engineering, said there was a real risk that many of these windfarms would not be built, because of high costs, falling power prices and more expensive credit. His words echo the concerns of others in the industry.
"We must fundamentally rethink the objective of energy policy in this country," Browne said. He compared the current need for urgent investment and new infrastructure with efforts to develop North Sea oil and gas fields in the 1970s and 1980s. "High oil prices provided a strong market pull. But governments also gave industry a helping hand, creating generous tax incentives and regulations, and helping to build strategic infrastructure," he said. "There's even more cause for government intervention today. That's because energy security and climate change mitigation are public goods. They would not otherwise be recognised by the free market."
One option, he suggested, would be for the government to direct state-controlled banks to lend money for green infrastructure projects, as is being done in Ireland. "Policymakers must be frank - the cost of supporting renewable energy will be borne by consumers who pay a little more for their delivered energy."
Browne said the UK risked being left behind in the global race to develop a low-carbon industry if ministers relied on market mechanisms such as carbon trading to drive change. "A lot of people say carbon trading, the European emissions trading scheme, will take care of this. In theory it can, but in practice it won't."
The scheme is supposed to encourage companies to trade the rights to emit carbon dioxide, with cleaner firms selling pollution permits to dirtier rivals - thereby setting a price on the emission of carbon. It has been dogged by a surplus of permits, the price of which has fallen to near €10 from €30 last summer.
Analysts say the price drop reflects a slowing demand for permits as recession-hit companies scale back production and cut their carbon emissions. But it could also indicate companies have sold large amounts of surplus permits to raise cash.
Browne said of the scheme: "Eventually I'm sure it will be terrific. Right now it needs to work side by side with simple regulations and simple incentives to get investors to invest in the right way."
He said the recent decision by Shell to stop investments in wind, solar and hydro-electric power reflected a move "back to basics" for oil and gas companies. "I read it as a pure business decision," he said. "Oil companies have a tremendous number of things they've got to do in developing oil and gas. That's where their expertise is and that's probably where they're focused."
He said the large utility companies and independent firms might be better placed to develop renewables. "It's about focus. When telephones went from landlines to mobiles, the people who did the best in mobile telephones were not the people who did best in landlines. A new breed of people came up and dominated that industry. It may be the case with renewables too."
On the controversial plans by E.ON to build a new coal-fired power station at Kingsnorth in Kent, Browne said that the pragmatic need for a diverse energy supply should triumph over environmental concerns. "I think there's a practical reality here. From everything I've seen it looks like it does need to be done."
He said the price of carbon would need to be much higher than today to realise carbon capture and storage, where pollution could be trapped and piped to underneath the North Sea. "It is expensive, it is very expensive. In the long term we may find a way of capturing the carbon and putting it back in the ground. Right now that looks like a really big challenge with no solution. But it may have a solution."
He said it was vital that environmental policy was at the heart of government. "It's essential that we do not compartmentalise climate change as an issue. Environmental integrity should be made a tangible part of other social priorities, such as economic prosperity and national security. This will require a new approach to policy across all levels of government and all government departments."
The financial crisis has hit numerous firms in the renewable power sector:
Shell pulled out of the British wind sector last year. It believes only biofuels, and carbon capture and storage make sense, alongside oil and gas.
E.ON The economics of the world's biggest offshore wind farm project are "on a knife edge", warned the chief executive of one of the companies behind it.
Centrica planned to invest in 1,500MW of offshore wind capacity but is now reviewing its investment plans.
BT is trying to develop renewable energy projects to generate its own green power, but it says government rules for on-site renewables are threatening its schemes and it may not go ahead without a change in regulation.
The government must draw up a masterplan to meet the UK's ambitious targets of providing 15% of the country's power from renewables by 2020, National Grid's chief executive, Steve Holliday, has warned.
As investment in alternative sources of energy dries up because of the credit crunch, Holliday called for more subsidies to make sure enough wind farms and other sources of renewable energy are built in time. He also called for tighter regulation of energy markets, even at the expense of competition.
Analysts estimate that £234bn total investment in energy will be needed by 2025, to be paid for by consumers. Holliday said that reducing energy demand - and bills - was the only way to afford the vast sum. Smart meters installed in homes, for example, can ration electricity supply during peak demand by switching off some appliances for a short period.
But with the cost of capital for developers increasing, National Grid executives are frustrated at what they see as a lack of joined-up thinking and urgency displayed by the government over the 2020 targets. Holliday said: "We should be very worried there is not a masterplan. If you set an aspiration you [should] work out a plan to do this."
This summer the government will publish several policy documents on renewables, how to promote manufacturing of clean energy equipment such as wind turbines, and how to meet the UK's carbon budgets.
But National Grid is concerned that they could prompt another round of consultations, further delaying decisions. The firm is also worried that the election of a Conservative government next summer could lead to a review of any decisions made.
There is a danger, Holliday said, that "we are going to wake up and say we have not got a chance of meeting the target because of the time we have lost".
The government signed up to the EU targets in early 2008, agreeing to source 15% of its energy from renewables by 2020. Over a third of all electricity generated will have to come from renewable sources, up from about 3% today.
A consultation on how to meet this target will be concluded this summer. "Why does it take a whole year?" asked Matthew Lockwood, from the IPPR thinktank. "One of the biggest problems around this area is confusion and people not being clear about what the government is doing. There is a huge vacuum. Announcements are just dribbling out."
He said that the delay over the strategy on how to roll out smart meters was a good example. The government originally intended to announce its decision last May. This was pushed back to November and the industry is still waiting.
A large increase in the number of wind farms is needed in the UK, according to the Royal Society for the Protection of Birds, after a study found far more could be built without damaging wildlife.
In the past the conservation charity has successfully campaigned against wind farms because of the potential damage to birds, helping to stop the biggest onshore development in Europe being built on the Isle of Lewis because of the risk to eagles.
But a new study, commissioned by the charity, has found wind farms pose no threat to birds and other animals if they are put up in the right area. The organisation now says the UK must build far more onshore if the country is to meet ambitious climate change targets.
In addition, the RSPB has called for an overhaul in the planning process to make it easier to build wind farms that pose no threat to wildlife, rather than wasting time and money on applications that will be defeated by local protests.
The study by the Institute for European Environmental Policy (IEEP) found the UK is lagging behind the rest of Europe in building wind farms because of a bureacratic planning process.
The UK was thirteenth in a European league table of wind power per head of population, trailing behind smaller states such as Belgium, despite having the best conditions for wind power.
The report suggested ruling out "bird sensitive" sites and making areas where wildlife are not affected a priority so that developments are put up straight away. Local authorities should have renewable energy targets and be given training on siting wind farms. Communities should be given more opportunity to profit from developments through cheap energy tariffs, investment in wildlife schemes or even ownership.
Ruth Davis, Head of Climate Change Policy at the RSPB, said a more focussed planning process would enable the UK to take advantage of wind.
She said: "We need a clear lead from government on where wind farms should be built and clear guidance for local councils on how to deal with applications. We must reduce the many needless delays that beset wind farm developments.
"This report shows that if we get it right, the UK can produce huge amounts of clean energy without time-consuming conflicts and harm to our wildlife. Get it wrong and people may reject wind power. That would be disastrous."
However, Dr John Constable, Research Director at The Renewable Energy Foundation, insisted wind farms were not the answer.
He said: "The RSPB appears to underestimate the costs and technical challenges of managing large wind fleets and to overestimate the likely impact of such developments on climate change. In fact, the costs are very high, the difficulties extreme, and the benefits, frankly, modest."
Researchers have been studying ways to generate renewable energy by using the "natural motion " of the tides around the north West of England and North Wales.
The results showed that four barrages stretching across estuaries at the Solway Firth, Morecambe Bay, the Mersey and Dee rivers could be capable of meeting approximately half of the region's electricity needs.
The study was carried out by the University of Liverpool and Proudman Oceanographic Laboratory.
Professor Richard Burrows, from the University's Maritime Environmental and Water Systems Research Group, said: "With concerns mounting over the UK's future energy provision it will soon become paramount that all sources of renewable energy are fully developed.
"Unlike the wind, tides are absolutely predictable. The geographical location of the UK, and the seas that surround it, provide a great platform for marine renewable sources."
The barrages, which would run from one bank of an estuary to the other, would guide water through sluices and power turbines for up to 11 hours a day.
Prof Burrows added: "In terms of the four North West barrages, the energy extracted could equate to 5 per cent of the UK's electricity generation needs."
The study used advanced two-dimensional computational modelling to gather its findings.
Those in favour of building barrages also say they would provide substantial sea defence, as well as flood alleviation, by draining the estuary following heavy rainstorms.
Any mass investment in a global programme must not be squandered on saving capitalism from itself
The question that plagues those of us who support the idea of a green new deal is this: where will the money come from? The proposal seems sound enough: as the world economy contracts, governments create millions of new jobs by investing in environmental measures. We'll need a massive carbon army to insulate and improve houses, build renewable power plants and manufacture energy-efficient devices. In principle it appears to solve two problems at once.
But the money that might have funded it has gone: squandered on the banks. I doubt I'm the only one seething about the contrast between the government's open-handedness towards the financial sector and its refusal to pay even a few million to bail out collapsing renewable energy projects. But now we are lumbered with monumental inter-generational debt, it would surely be madness to load on even more.
Next month, the UN environment programme will be launching an idea that seems plausible to me. It proposes a $750bn package, possibly funded by a tax on oil. UNEP's chief executive Achim Steiner argues:"If you were to put a five-year levy on OECD countries of $5 a barrel, you would generate $100 billion per annum. It translates into roughly 3 cents per litre. It would be almost, if not totally, unnoticed by the consumer."
Given the wild fluctuations in the oil price over the past two years, and their surprisingly limited economic impact, I think he's right. Inasmuch as the price increase was felt, it would discourage consumption and stimulate demand for more efficient vehicles.
Fine. But we still have to ask what the green new deal is for. Is its purpose to save capitalism from itself, kickstarting global growth again, or to create a sustainable economy, perhaps along the lines of the steady state economy promoted by Herman Daly? At the moment, the cure being prescribed by almost everyone is more of the disease. Economic growth is the fundamental environmental problem. No new deal will be green unless its purpose is to find a better way of meeting our immediate needs without trashing our long-term interests.
The Hawaiian island of Kona, a volcanic stump with white sand beaches and aquamarine waters in the middle of the Pacific, has long drawn adventurers and paradise-seekers. It was here that Captain James Cook was stabbed by islanders and left to die face down in the surf.
More than two centuries on, new pioneers are stalking its shores. Last week a small company backed by the oil giant Royal Dutch Shell provided the first batch of a locally made oil to the American government for testing as aviation fuel. It has the combustion properties of fuel derived from crude oil but it is made from algae.
The advantages over conventional biofuels are clear – it is not made from crops grown on agricultural land so it cannot be blamed for driving up food prices or using scarce fresh water.
It sounds almost too good to be true. It probably is. The technology to convert algae into usable fuel on a large scale is still at least a decade away, and it is unclear if it will ever be practical on a large scale.
Shell refuses to say how much it has invested in the project. Nonetheless, it has put the full weight of its PR machine behind this and the handful of other renewable technologies it is developing, giving it a nice green sheen even as it deepens its involvement in controversial areas such as the Canadian tar sands.
The company has had to deal with a $100 drop in the price of oil and lower demand for its products, so it is cutting spending and has pulled out of several renewables sectors altogether. Chief executive Jeroen van der Veer confirmed last week that the company will stop investing in hydrogen technologies and wind power – it has pulled out of all its British projects in the past year. Solar has gone the same way. That leaves clean coal technology and “second generation” biofuels such as algae as its primary focus.
The fast-growing algae are native to the seas off Hawaii – cultured in tanks fed with sea-water in a pilot plant run in collaboration with the local firm HR Biopetroleum. If its scientists can perfect the algae-to-oil process, Shell says it will fund an industrial facility of 20,000 hectares, built by Cellana, the Shell-HR Biopetroleum joint venture, on coastal land unsuitable for farming.
A facility of that size could produce 16,000 barrels of oil equivalent a day. At that rate, seven such plants would be needed to generate as much oil as one reasonably productive offshore platform. The good news is that algae can double their mass several times a day using sunlight alone and the supply would never run dry.
On the Kona coast, Cellana has already built some photo-bioreactors – essentially high-tech greenhouses that use natural light and a carbon-dioxide injection system to speed up natural growth rates. The company is testing new strains of the plant to find the most oil-rich and fast-growing varieties. The conversion process is similar to that for other biofuels: the algae are dried and broken down into oil and protein.
The process is still in development. Gordon MacManus, an analyst at the research firm Wood Mackenzie, said that, as a biofuel source, algae hold great potential but the technology is at a “very early stage”. He said that it could be “more than a decade” before it is commercially practical.
It is one of several “second-generation” biofuels that could one day overtake Shell’s other efforts in making biofuels from crops. It has recently increased its stake in Codexis, an American group that develops enzymes to improve the process of creating ethanol from lignocellulose, the woody part of plants, that another Shell partner Iogen is working on.
Such fuels are many years from making it to the market – if, indeed, they make it at all. And Shell leaves most of the scientific challenges to its partner organisations; it provides the cash and research support. Meanwhile, the company remains one of the world’s biggest providers of often-ma-ligned “first generation” biofuels such as corn-based ethanol.
Just as the first drum of algae-produced oil was flown from Kona to America’s Defense Advanced Research Projects Agency, Shell said that it was abandoning renewables, except for some biofuels.
When the announcement was made last Tuesday, critics accused Shell of a sell-out. But the company said it was responding to a change in the economic climate and the new reality that crude oil is now about $100 a barrel cheaper than a year ago.
Shell was never that green in the first place. It has the largest investment programme of any private enterprise in the world, spending $90 billion (£62 billion) in the past five years on projects ranging from the Gulf of Mexico to Iraq. Over that same period it gave back $68 billion to shareholders through dividends and share buybacks.
By comparison, its investment in alternative energy is tiny, amounting to only $1.7 billion – less than 2% of its total spending over the same five years. That investment programme is about to dwindle further. Van der Veer’s message last week was straightforward: it’s not that renewables don’t make money, it’s that they don’t make enough. “We do not expect [renewables] to grow much from here, due to portfolio fit and the returns outlook compared with other opportunities,” he said.
Far from abandoning renewables, Shell said, it is simply narrowing its focus on the areas where it has the most expertise and can effect the most change.
Environmentalists fear that Shell’s efforts to go green could end up like Captain Cook on the shores of Kona – left to die in the surf.
Barack Obama may be forced to delay signing up to a new international agreement on climate change in Copenhagen at the end of the year because of the scale of opposition in the US Congress, it emerged today.
Senior figures in the Obama administration have been warning Labour counterparts that the president may need at least another six months to win domestic support for any proposal.
Such a delay could derail the securing of a tough global agreement in time for countries and markets to adopt it before the Kyoto treaty runs out in 2012.
American officials would prefer to have the approval of Congress for any international agreement and fear that if the US signed up without it there would be a serious domestic backlash.
Stephen Byers, co-chairman of the International Climate Change Taskforce, said: "The Copenhagen climate change talks in December will come at a difficult moment. The timing couldn't really be worse for the Obama administration. It is vital that this is recognised by the international community. If need be, we should be prepared to give them more time – not to let them off the hook and escape their responsibilities, but ensure they are politically able to sign up to effective international action which reflects the scale of the challenge we face."
Byers, a former cabinet minister who has close contacts with senior Democrats in the Obama team, added: "The practical reality is that a delay into 2010 will still leave time for a new international structure to be put in place for 2012 to follow from Kyoto. Such a delay would be a price worth paying to bring the United States into the global effort to tackle climate change."
The White House's new chief science adviser, John Holden, was a member of the climate change taskforce and Todd Stern, one of its advisers, is working with Hillary Clinton at the State Department and will lead negotiations for the US in Copenhagen.
Stern has warned it will be a tall order to get congressional approval before Copenhagen.
Obama has committed the US to reducing its emissions to 1990 levels by 2020, but scientists and European governments insist deeper cuts are needed. Obama has suggested that the US could compensate with swifter reductions in the years beyond 2020. His recent budget proposal calls for reducing US emissions roughly 80% by 2050 over 2005 levels.
The British government view, including that of the energy secretary, Ed Miliband, is that the Obama administration can and will strike a deal at Copenhagen, but officials in Washington fear America may be running out of time. They have even been looking at whether an agreement would be seen as an international treaty requiring a two-thirds majority in Congress, or whether it could be forced through as a presidential executive order.
But the opposition within America is potentially substantial, and might be hardened if Obama looks like he is presenting Congress with a fait accompli.
There are thought to be as many as 15 Democratic senators who represent "rust-belt" states dependent on coal mining, steel production and heavy manufacturing, all big emitters of carbon.
There have also been suggestions that the cost of any climate change legislation may be higher than the $646bn (£444bn) suggested by the Obama administration.
On Tuesday, Obama recommited himself and America to the principle of a "cap and trade" scheme, but said he would try to introduce a regional scheme that would ensure energy prices did not rise uniformly across America.
Stern would prefer to see the US go to Copenhagen with congressional approval, telling a recent symposium: "The optimum would be [climate] legislation that is signed, sealed and delivered. It has been a long time now that countries have been looking for the United States to lead and take action. I think nothing would give a more powerful signal to other countries in the world than to see a significant, major, mandatory American plan."
The Democratic-led U.S. Congress gave final approval on Wednesday to sweeping land and water conservation legislation that environmental groups praised as one of the most significant in U.S. history.
The measure, a package of more than 160 bills, would set aside about 2 million acres -- parks, rivers, streams, desert, forest and trails -- in nine states as new wilderness and render them off limits to oil and gas drilling and other development.
The House of Representatives approved the measure on a vote of 285-140 a week after it cleared the Senate, capping years of wrangling and procedural roadblocks.
It now goes to President Barack Obama to sign into law, which he is expected to do swiftly.
"I can't think of a single bill that has ever done more to ensure the enjoyment of, and access to, wilderness areas (and) historic sites," said Democratic Senator Jeff Bingaman who chairs the Energy and Natural Resources Committee.
Opponents, most of them Republican, complained the legislation would deny access for oil and gas drilling and said House Democrats refused to consider changes.
The 2 million acres that would be designated as new wilderness are mostly in California, followed by Idaho, Utah, Colorado, Oregon, Virginia, West Virginia, New Mexico and Michigan.
Separately, the legislation would permanently protect and restore a 26 million-acre (10.5 million-hectare) system composed of the U.S. Bureau of Land Management's most historic and scenic lands and waters, including the Canyons of the Ancients in Colorado and Red Rock Canyon outside of Las Vegas.
Environmental and historic groups praised the legislation.
"Future generations will look back at this day as a major milestone in our nation's conservation history," said William Meadows, president of the Wilderness Society.
"It has been a long and difficult road, but today, Congress acted on behalf of hunters and anglers who understand the need for intact habitat," said Tom Reed of Trout Unlimited.
Editing by Andy Sullivan and Peter Cooney
A "perfect storm" of food shortages, scarce water and high-cost energy will hit the global economy before 2030, said the government's chief scientific adviser, John Beddington, last week. Factor in accelerating climate change and this lethal cocktail leads to public unrest, cross-border conflict and mass migration — in other words, an economic and political collapse that will make today's economic recession seem very tame indeed. But though I totally agree with John Beddington's analysis, I think he's got the timing wrong. This "perfect storm" will hit much closer to 2020 than 2030.
It may seem inappropriate — callous even, with unemployment at the two million mark in the UK — to be inviting people to get worked up about some possible economic collapse in the future. But if we are to avoid that ultimate recession, from which there will be no conventional recovery in a normal boom-and-bust cycle, then we have to start thinking about today's recession in a completely different way. Both in terms of our analysis of underlying causes and appropriate remedies.
On the analysis front, people seem blind to the fact that the causes of the economic collapse are exactly the same as those behind today's ecological crisis — and behind accelerating climate change in particular. As Adair Turner's first report as chair of the Financial Services Authority (FSA) demonstrates, the neo-liberal obsession with deregulation has done untold damage to capital markets. But people should understand that the same deregulatory fervour has caused untold damage to the natural environment, all around the world, for the last 20 years or more.
It's exactly the same when one looks at the unholy trinity that has made today's capital markets so spuriously dynamic: mispricing of risk, misallocation of capital, and misalignment of incentives. Catastrophic impacts on markets; catastrophic impacts on the environment.
And then there's the debt issue. Governments have systematically stoked up levels of personal and national debt (including insane asset bubbles in housing, land and property) explicitly to force-feed high levels of economic growth. We will all be paying off those financial debts for decades to come.
On the environment front, as our financial debts have built up, so have our debts to nature — in terms of the unsustainable depletion of natural resources, measured by the loss of topsoil, forests, fresh water and biodiversity. Everybody knows that liquidating capital assets to fuel consumption is crazy but nobody seems to know how to stop it.
There is a simple conclusion here: the self-same abuses of debt-driven "casino capitalism" that have caused the global economy to collapse are what lie behind the impending collapse of the life-support systems on which we all ultimately depend.
As regards appropriate remedies, the link between today's recession and the perfect storm that awaits us in 2020/30 couldn't be clearer: sort out today's calamity by investing in infrastructure and technologies to help avoid tomorrow's infinitely worse calamity. In other words, a massive "green recovery package" along the lines we are now seeing in the US, South Korea and other European countries, focusing on energy efficiency, renewables, smart energy grids, new transportation solutions and so on.
The government is sort of interested in this, with lots of very eloquent words about a new low-carbon industrial strategy. But as the Sustainable Development Commission has pointed out, the percentage of the total recovery-based expenditure devoted in the UK to this kind of "sustainable new deal" to date is derisory. It's around 7% as opposed to 80% in South Korea, for instance. We simply have to ensure that the unsustainable elements in today's recovery package (such as the useless VAT giveaway) do not overwhelm the low-carbon, sustainable elements.
But the commission has gone even further than this by raising the whole issue of economic growth. Is it possible to avoid the "ultimate recession" if all we are doing is trying to get back as fast as possible to the same old "economic growth at all costs"? In a report to be published next week (provocatively entitled Prosperity without growth?), the SDC urges politicians of all parties to get serious about the very real limits to growth we're running up against today – both social and environmental.
Politicians serve us ill by disconnecting their policies for economic recovery from what has to happen very urgently indeed if we are to avoid the horrors of accelerating climate change and the kind of "perfect storm" that the chief scientific adviser is flagging up as inevitable – unless we fundamentally change the rules of the growth game.
• Jonathon Porritt is founder director of Forum for the Future and author of Living Within Our Means: Avoiding the Ultimate Recession. He is also chairman of the UK Sustainable Development Commission.
The long-awaited $1 trillion plan to restore the toxic US banking system to health triggered a bout of frenzied buying on stock markets around the world, as investors bet that the Obama administration is now sketching a road map out of the credit crisis.
Tentative signs of stability in the US housing market, at the heart of the financial crisis, added to a rare sense of optimism that the long economic chill might be thawing. While plenty of sceptical voices were trying to be heard yesterday, buoyant investors said the rescue plan puts in place an essential building block for a recovery. By the end of the day the Dow Jones Industrial Average in New York had soared to close 6.84 per cent up, the fifth biggest day rise in its history.
Tim Geithner, Barack Obama's embattled Treasury Secretary, who had been derided for the lack of detail when he announced the outlines of his strategy to tackle the credit crisis last month, put flesh on the bones of his rescue plan yesterday. The US government put up matching funds and hundreds of billions of dollars in debt to help private investors buy the toxic loans that have been clogging bank balance sheets. In all, $1trn (£680bn) could be put to work to rid banks of these assets, freeing them up to start lending again. "This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically," said Bill Gross, the bond investor who heads Pimco, a California fund manager. Not only would the scheme relieve the doubts surrounding the solvency of the banking system, he said, but investors – and the US taxpayer – would make a tidy profit.
Most of the assets are bundles of mortgages written during the housing boom and whose value will keep going down as long as house prices are falling and foreclosures are rising. The Geithner plan is aimed at encouraging investors to buy the assets, pumping cash into the banks which decide to sell.
The plan is the latest piece in a jigsaw of initiatives to reboot the economy, and members of the administration have argued it is even more important that the $787bn economic stimulus package pushed through Congress last month. Struggling homeowners are getting subsidies to pay their mortgages and the credit markets have been flooded with trillions of dollars from the Federal Reserve, to bring down interest rates.
"We've already taken a bunch of actions to help get mortgage interest rates down, to help millions of Americans refinance their homes, to take advantage of lower interest rates," said Mr Geithner. "All these things are designed to help get credit flowing again at lower cost to businesses and families across the country."
Lower mortgage rates and much lower house prices appear to be stimulating the housing market. Sales of second-hand homes rose unexpectedly strongly last month, according to a report yesterday, rising 5 per cent. Investors said rising stock markets and a more stable housing market could encourage consumers to start spending again. That in turn would make businesses less likely to fire staff, and an end to the recession could come into view later this year. The US economy has been in recession since December 2007, and unemployment passed 8 per cent in February.
Stock markets in other countries, which have followed the US into recession, also surged yesterday. The FTSE 100 index of leading UK shares was up almost 3 per cent, but it had closed before the buying frenzy reached its peak in New York. Wags described the reaction as a bailout for Mr Geithner. Criticism of his performance "comes with the job", the Treasury Secretary said yesterday, adding that he was focused on restoring order to the financial system.
China's central bank has called for a new global reserve currency run by the International Monetary Fund to replace the US dollar.
Central bank governor Zhou Xiaochuan did not explicitly mention the dollar, but said the crisis showed the dangers of relying on one currency.
With the world's largest currency reserves of $2tn, China is the biggest holder of dollar assets.
Its leaders have often complained about the dollar's volatility.
China has long been uneasy about relying on the dollar for trade and to store its reserves and recently expressed concerns that Washington's efforts to rescue the US economy could erode the value of the currency.
His speech was, unusually, published in both Chinese and English, signalling it was intended for an international audience.
"The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system," said Mr Zhou in an essay on the People's Bank of China website.
Mr Zhou said the primacy of the US currency in the financial system had led to increasingly frequent crises since the collapse in the early 1970s of the system of fixed exchange rates.
On Tuesday, the dollar weakened against most major currencies following the announcement of a US plan to buy up toxic debt.
'Light in tunnel'
Mr Zhou said the dollar could eventually be replaced as the world's main reserve currency by the Special Drawing Right (SDR), which was created as a unit of account by the IMF in 1969.
"The role of the SDR has not been put into full play, due to limitations on its allocation and the scope of its uses," he said.
"However, it serves as the light in the tunnel for the reform of the international monetary system."
The essay comes before the G20 summit in London on 2 April, at which reform of the international financial system is top of the agenda.
"This confirms that China intends to play fully its role of global economic and political power at the next G20 summit," said Sebastien Barbe, an analyst at French financial service firm Calyon in Hong Kong.
Airline industry losses this year are expected to be nearly double the level forecast in December, as carriers are hit by steeply falling demand from premium passengers and by record falls in cargo traffic.
Giovanni Bisignani, director general of Iata, the airline industry trade association said on Tuesday: “The state of the airline industry today is grim. Demand has deteriorated much more rapidly with the economic slowdown than could have been anticipated even a few months ago”.
Relief from lower fuel prices had been “overshadowed” by falling demand and plummeting revenues, he said. “The industry is in intensive care.”
Net losses are forecast to reach $4.7bn this year, up from the $2.5bn forecast in December, as global economic conditions rapidly deteriorate.
Iata also revised its estimate for airline industry net losses for last year from $5bn to $8.5bn, as carriers were hit by the sudden and sharp fall in demand from lucrative premium passengers, where most network carriers generate the bulk of their profits, and from cargo.
Premium passenger numbers fell by almost 17 per cent in January year-on-year, while cargo traffic fell by 23 per cent.
Airline passenger traffic volumes are forecast to fall this year by 5.7 per cent with cargo demand dropping by 13 per cent, as the aviation sector suffers a much bigger slump than forecast as recently as December.
Airlines are facing one of the biggest ever annual falls in revenues in 2009 with a drop of $62bn or 12 per cent to $467bn. By comparison, industry revenues fell by only 7 per cent in the two years after the September 11 terrorist attacks in the US.
Mr Bisignani said the industry’s continuing deep losses combined with the airlines’ total debt of $170bn meant that the pressure on their balance sheets was “extreme.”
Consumers are benefiting from the plunge in demand for air travel, as airlines are forced to cut fares in order to try to stimulate traffic and to bring in cash. Iata said yields or average fare levels were expected to fall by 4.3 per cent this year.
The industry is shrinking in response to the slump in demand with capacity forecast to fall by 6 per cent this year, but actions to cut flights and ground aircraft are still not keeping pace with the fall in demand.
Iata said airlines in the US were the only region to have been able to shrink capacity in line with the fall in demand, and they were forecast to turn large 2008 losses into a small 2009 profit. However, airlines in all other regions would find the deep recession causing significant net losses, with Asia Pacific carriers the hardest hit with forecast net losses of $1.7bn.
Mr Bisignani said weak consumer and business confidence was expected to keep spending and demand for air transport low.
“The prospects for airlines are dependent on economic recovery. There is little to indicate an early end to the downturn. It will be a grim 2009. And while prospects may improve towards the end of the year, expecting a significant recovery in 2010 would require more optimism than realism,” he said.
As airlines are forced by the recession to defer and even cancel orders for new aircraft, the makers of commercial jets, Airbus and Boeing, would suffer a sharp drop in production, said Iata, with deliveries set to fall by around 30 per cent by 2011.
Gordon Brown signalled that Britain would not announce a big fiscal stimulus in next month’s budget, as the failure of a gilts auction on Wednesday underscored concerns about the impact of further borrowing on the deteriorating public finances.
The British prime minister has consistently advocated using next week’s G20 summit to agree a global fiscal stimulus – as demanded by Barack Obama, the US president – but he has been boxed in by dire public finances in the UK.
He appeared to respond to pressure from Alistair Darling, his chancellor, and Mervyn King, Bank of England governor, in conceding on Wednesday there was little room for Britain to announce a second wave of tax cuts or spending increases.
Speaking in New York, he sought to shift the political focus from a fiscal stimulus to other mechanisms intended to kickstart the economy, amid forecasts that the UK deficit could rise to 11 per cent or 12 per cent of gross domestic product next year.
Asked at a Wall Street event about Mr King’s warning against a big new fiscal stimulus, Mr Brown said: “If you put that question to Mervyn King, he will say ... that we’ve got to be ready to take the action that is necessary to restore [economic] growth.”
The prime minister said Britain was taking such action in three ways, stressing the importance of quantitative easing – “one of the most effective and quicker ways of getting money into the economy” – in addition to last year’s fiscal stimulus and “incredibly low” interest rates. “If you take these three changes that have happened over the last few months together, that’s where you look for results on the combination of these three,” Mr Brown stated.
Downing Street insisted that people should “not read anything” into the failure of the single gilts auction, despite it being the first such failure for seven years. Officials said it reflected specific pricing conditions attached to the auction.
Aides to the prime minister said that, while he had not completely ruled out “targeted measures” in the budget, he wanted to move on from the “false argument” about tax cuts to highlight the battery of weapons being deployed to fight the recession.
Government insiders contrasted the £75bn ($110bn, €81bn) being pumped into the economy by the bank through quantitative easing with the more limited £20bn fiscal stimulus last November.
Mr Brown had hoped to use next week’s G20 summit of leading developed and emerging nations to gain international political cover for a substantive fiscal boost in the Budget. But he conceded on Wednesday that no concrete commitments to stimulus packages would emerge from the London meeting.
Facing disagreement with other European leaders and marked resistance from the Bank and Treasury, the prime minister said the announcement of fiscal and monetary decisions was a matter for each country.
“Nobody is suggesting that people come to the G20 and put on the table the budget that they’re going to have for the next year,” Mr Brown said.
“What we are suggesting is that we have together to look at what we have done so far ... and then say what should happen next? I see consensus, not a disagreement, on that.”
Investors may have lost some of their previously healthy appetite for British government debt: an auction for conventional (non index-linked) gilts has failed, for the first time since 1995.
The Debt Management Office (DMO), which is responsible for managing the Government's debt, said it had failed to attract enough bidders for its latest issue, some £1.75bn of gilts maturing in 2049.
Bids of £1.63bn were received, leaving the issue only 93 per cent covered, which is low by recent standards where demand has usually exceeded supply by a ratio of two to one. An issue of index-linked gilts had also gone uncovered in 2002, the DMO said. Tim Morgan, an analyst at Shore Capital, said the Government's cash requirement, including the money needed to redeem previous gilt issues, could hit £240bn.
He said Britain was running a risk of a "debt vortex", where the debt burden could become unsustainable. "It is by no means clear that this required sum can be realised, less still that it can be raised in sterling and at current low interest rates. The only sure way to avert debt-vortex risk would be to unveil major cuts in future public spending," Mr Morgan explained.
As Prime Minister Gordon Brown campaigns for more government spending to be pledged by the world's leading economies at next week's summit of the G20 nations, the markets are moving against him.
Steven Major, the head of global fixed-income research at HSBC, said last night: "The bond markets are increasingly worried about the large amounts of debt the UK is taking on, while poor inflation numbers add to worries on the economy."
Despite a careful approach by the Bank of England in its policy of quantitative easing – buying gilts to inject cash into the economy – and a promise to co-operate fully with the DMO to endure there is no clash in the timing of their activities, there appeared to be some annoyance among staff at the DMO that the Bank's policy had undermined the sale.
"Yields at these levels are not at all attractive," Robert Stheeman, the chief executive officer of the Debt Management Office, said yesterday. "Yields have shifted downward. Why have they shifted down? It's partly because of the Bank of England's announcement about quantitative easing."
Yields did in fact jump by some 20 basis points during trading yesterday, leaving the benchmark 10-year gilt yield at 3.32, before it fell back again later.
The fact that the long-dated gilts auctioned yesterday by the Government lay outside the Bank of England's quantitative easing gilt purchase programme – which targets gilts in the range of five- to 25-year maturities – is not reassuring, as it means that the "pure" institutional investor interest in this paper may not be healthy enough to sustain the vast scale of the gilts issue programme – £147.9bn or more in the coming financial year.
Long-term worries about inflation, the stability of Britain's finances and doubts apparently raised by Mr King in his testimony to MPs yesterday played a part.
Colin Ellis, an economist at Daiwa Securities added: "The failed auction probably wasn't only a reaction to Mr King's comments that the Bank might not spend the full £75bn on gilts – it's worth bearing in mind that Mervyn King is just one of nine MPC members who decide how much to spend.
"The long maturity of the bond is also likely to have been a significant factor, at a time when investors strongly favour short-dated paper."
The DMO insisted that it planned to stick to its issuance calendar. Mr Stheeman said: "The market does place a premium on us acting in a transparent way."
He added: "We will continue with our debt issuance plans and the Bank will decide what it wants to do in terms of monetary policy. For practical reasons, we have to ignore it."
Ed Miliband must be the bravest man in Gordon Brown's Cabinet. Anyone who would agree to serve as Secretary of State for Energy and Climate Change has to be either very dull or very brave. And no one has ever accused this Miliband of lacking brain power.
Miliband's first problem is the contradictory nature of his mission, which he describes as "sustainability, security and affordability". Sustainability means reducing the carbon content of the fuels Britons use to heat their homes, drive to work, cook their dinners and wash their clothes.
But security of supply means making sure the lights don't go out – and that requires a lot more generating capacity that is available all of the time, not just when the wind is blowing or the sun is shining (think coal and nuclear). And affordability is another word for "cheap enough not to tax the budgets of low-income consumers".
Since carbon-free sun, wind and nuclear power cost more than coal and natural gas, affordability conflicts with the goal of reducing carbon emissions, which in turn conflicts with the goal of security of supply.
Miliband took the job knowing that he is inheriting a mess. He knows that the key to the development of a less carbon-intensive energy sector is to put a price on carbon – to make polluters pay. But Britain is in the midst of a recession, and loading extra costs on businesses can hardly be high on the Prime Minister's priority list.
True, there is the European cap-and-trade system designed to price carbon by putting a value on tradable permits to emit CO2. But that price fluctuates wildly, from somewhere around 40 euros to less than 10 euros. Great for traders in permits, but not so good for entrepreneurs trying to work out whether available subsidies make their wind farms or solar panels cost-competitive with carbon-emitting fuels.
Economists agree that the only way to give renewables a cost target to aim at is to tax carbon – but the political will to do that is no more evident in Britain than in America.
Miliband also has to contend with the incoherence of his green constituency. The environmental lobbyists want wind power, but are great advocates of Nimbyism – not in my back yard – nor anywhere that might interrupt the view anywhere they might choose to visit. They want carbon-free generating stations, but oppose new nuclear plants for reasons ranging from unhappiness with the methods available to dispose of nuclear waste to the risk of terrorism.
To make matters worse, Miliband has decided to postpone a decision on the new coal-fired plant due to be built at Kingsnorth in Kent. This pleases environmentalists, but threatens to make it more difficult for Miliband to meet his goal of security of supply and, crucially, postpones the development of clean coal technology. The Secretary of State recognises that "by 2020 a third of our power plants will be closed due to age or rising environmental standards"; that producers of renewables are as caught in the credit crunch as other businesses; that the fall in the price of oil from its lofty $140 level has caused the cancellation of many renewable energy projects; and that a resumption of economic growth will increase the demand for energy, even if sensible conservation efforts are successful. Given the lead time required for the construction of any project – green or otherwise – he must decide, soon, just where the power will come from to keep the lights on.
Then there is the question of jobs – the jobs that Miliband claims will be created by Britain's new energy economy. The revival of the nuclear industry would, under ordinary circumstances, deliver just the sort of high-value employment the Prime Minister says is crucial for Britain's future prosperity. But Areva, 85 per cent owned by the French government and scheduled to handle the construction of at least 10 new nuclear stations in Britain, has announced that the really good jobs will be reserved for workers in its factories in France, with British firms eligible to bid only for the low-value work. Free trade has never appealed to President Sarkozy, who holds Areva's purse strings.
There's more, including Miliband's inability to get his EU partners to make the investment needed to dilute Europe's dependence on Russian natural gas by tapping the resources of the Caspian Sea, and the difficulty inherent in favouring more costly renewable energy sources and at the same time stating that "it is no part of my climate change strategy to drive the most vulnerable consumers into fuel poverty".
Perhaps most difficult for the Secretary of State will be to overcome the barriers to his goal of making the UK "the best place in the world to locate or build a low-carbon business". Britain is becoming mired in debt, which any entrepreneur will know means swingeing increases in taxes, in addition to the Prime Minister's planned increase of the top marginal income tax rate to 45 per cent. Also, dealing with the multiple bureaucracies that stand between an entrepreneur and the ribbon-cutting on his new venture is beyond irksome. Miliband will have to leave the solution – or not – of those problems to his colleagues. He has problems enough to tax his formidable intellect and consensus-building skills.
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