North Sea should protect UK from energy price rises
The proposed transition to net zero by 2050 is looking unlikely, so why not use fuel we drill ourselves?
Recent energy price increases could seriously hamper efforts to rein in inflation across the world, not least in energy importing nations such as the UK.
Brent crude topped $91 (£73) a barrel last week, for the first time since October. The international benchmark oil price, just $73 as recently as mid-December, has surged 25pc over the last four months.
It complicates the quandary faced by central banks everywhere, as policymakers consider as and when to start slashing interest rates. Oil prices have been trending upward since last summer, as signs of a global economic recovery have boosted estimates of future energy demand. Global oil use is expected to strengthen further over the next two quarters, with the Opec exporters’ cartel last week declaring “a robust oil demand outlook for the summer months”.
After a series of production cuts, Opec members are restricting output by 2m barrels per day – some 2pc of global demand. The 13-nation body, which controls two fifths of global crude output and four fifths of known reserves, is reviewing these constraints when it next meets in June.
Over recent years, particularly since full-on war erupted in Ukraine in February 2022, there has been deepening collaboration between Opec lynchpin Saudi Arabia and non-member Russia. Together, this Opec+ grouping controls almost half of global oil production and nine tenths of all reserves. As the US election approaches in November, the price of petrol and diesel is becoming highly politically sensitive – just one reason Opec+ might keep production restrictions in place, as global demand rises. Spiralling fuel costs are already helping Donald Trump to attack Joe Biden’s administration, as motorists baulk at the 7pc rise in average US pump prices over the past month.
As war in Ukraine continues, recent drone attacks on Russian refineries have sparked renewed concerns about fuel supply security.
And mounting Israel-Iran tensions are threatening to escalate into a wider war across the Middle East, endangering vast swathes of global energy production.
Last week, the Energy Information Administration, an official US body, said it expects Brent crude to average $88.55 a barrel this year, slightly up from its earlier $87 forecast.
Many industry insiders say this is behind the curve. Russell Hardy, chief executive of the world’s largest energy trader Vitol, last week told a conference that oil will trade in a $80-$100 range for the rest of this year.
Over recent days, a string of key figures in global commodity markets have warned we could see crude topping $100 this summer.
Already, rising fuel costs are translating into higher headline US inflation. America’s consumer price index rose 3.5pc during the year to March, we learnt last week, considerably up from 3.2pc the previous month.
But stubborn price pressures mean the US Federal Reserve will now likely wait longer before starting to unwind the sharpest tightening of monetary policy for many decades, finally bringing interest rates down from 5.25pc-5.5pc. Last week’s CPI number instantly killed hopes of a US rate cut over the next few months, triggering a sell-off across financial markets.
During March, bond yield differentials pointed to a 73pc probability of a rate cut in June, which had fallen to 53pc at the start of last week. But after news inflation rose sharply in March, the probability of a June rate cut collapsed to 21pc, as US shares fell and bond yields surged.
The Bank of England is bound to be heavily influenced by the Fed. The Monetary Policy Committee (MPC), as I’ve written before, lacks the courage and cognitive diversity to act unilaterally – and will ultimately fall into line behind other central banks.
Headline UK inflation has, of course, fallen steeply of late – to 3.4pc in February, down from 4pc the previous month. Another drop is expected when inflation data for March is released on Wednesday. Despite that, discouraging US inflation data is prompting speculation a delay in any downward shift by the Fed will see UK borrowing rates remaining at their 16-year high of 5.25pc for longer than previously forecast. The MPC will be mindful, of course, that fears US rates will stay up support the value of the dollar, putting upward pressure on UK inflation via a weaker pound and higher import costs. A stronger dollar, of course, also pushes up the price of crude oil – which is priced in the US currency – not least for countries dependent on energy imports.
As rising oil prices complicate the UK’s escape from this ghastly cost of living crisis, it was noteworthy a British energy company announced last week it is to start drilling at the biggest oil field discovered in the North Sea in at least 20 years.
EnQuest plans to bring two fields onstream with the potential to produce 500m barrels of crude over coming decades. This reignites the political battle over the UK’s energy future, with the Tories having just extended the 75pc “windfall levy” on North Sea output and Labour threatening to block new production completely, citing environmental concerns.
This makes no sense. There are around 300 active North Sea oil and gas fields, over half of which will cease production by 2030. The North Sea currently delivers the equivalent of 83pc of UK oil demand and 54pc of our gas use. What are our plans to replace those supplies? Even the climate change committee, the official green watchdog, acknowledges fossil fuels will still account for around half of Britain’s energy needs by 2030 and a quarter by mid-century.
And that’s if the proposed net zero 2050 transition to renewables is achieved, which looks pretty unlikely. So if that’s the case, that we’ll be using oil and gas for at least the next three decades, why not drill our own? Even if such energy is exported, at least UK energy workers would keep their jobs and the Treasury would get the tax.
‘The green watchdog accepts fossil fuels will account for half of our energy needs by 2030’