United Kingdom, energy and trade balance
It was an article similar to this one which prompted us to set up Mypower in 2009. This one is equally relevant, if a little hard going unless you have, like us, a fascination with UK energy strategy.
What it essentially concludes is that sustained and real economic growth requires a reliable and cheap source of energy and the UK doesn’t have that any more.
It’s a theme that we’ve been banging on about for some time now but still doesn’t seem to have caught the eye of the mainstream media. By the time this crucial issue reaches the wider public consciousness, it may be too late to do anything about it.
United Kingdom (UK) is widely associated with the industrial revolution which was a fossil fuel revolution.
Coal fueled the industrial revolution and UK also exported coal. The next cycle in UK’s energy history came with the discoveries and production from the oil and natural gas discoveries in the North Sea in the 1960’s which happened while UK’s indigenous coal production had been in general decline since the late 1920’s.
The oil and natural gas discoveries in the North Sea made UK again a net energy exporter for some years during the 1980’s and from the middle of the 1990’s through 2004, refer also figures 2, 3 and 4.
Beginning in 2005 UK again became a net importer of energy and as of 2012 UK imported around 42% of its primary energy consumption (primarily fossil fuels). The portion of imported energy for 2013 is expected to grow to 50% and beyond in the near future. Few countries have so rapidly transitioned from being self-sufficient and an energy exporter to develop such a high and growing dependency on imported energy.
The imports of expensive energy increasingly weigh heavier in the UK trade balance, refer also figure 7.
The UK has in recent years experienced a strong growth in energy production from renewables (light green area in figure 1). The recent years general decline in total energy consumption is likely primarily due to the ongoing financial crisis.
Coal’s portion within the UK energy mix declined as it was being replaced by a growing supply of oil and natural gas from the North Sea. The growing supplies from the North Sea may at the time have defined the UK government’s position during the coal miners strikes in 1984 – 1985.
The portion of fossil fuels in the UK’s energy mix has declined from 92% in 2008 to 87% in 2012, mainly due to lower oil and natural gas consumption following the financial crisis and persistent higher oil and natural gas prices.
In 2012 barely 5% of the UK’s energy consumption was from renewables which also includes hydroelectric.
The chart illustrates the rapidly growing gap between UK’s energy production and consumption. And the figure also illustrates that the growth in energy production from the renewables has not offset the decline in fossil fuel production.
Presently the UK’s total energy production (based upon TOE [TOE; Ton Oil Equivalents]) is at levels with the 1960’s. As the production declines below 100 MTOE/a it will be at levels with the production back in 1880 – 1890 when coal production grew.
OIL, NATURAL GAS AND COAL
Common in the three charts that follow are that they incorporate developments in consumption (grey area), production (green area), net exports (blue area), net imports (red area) and nominal price developments (black dots connected by a grey line plotted versus the left vertical axis). To enhance the illustration of the developments, as these is some overlap, a scaled transparency of the colors has been applied.
A recurring theme for oil and natural gas (with the exception of natural gas in North America) has been the rapid rise in their prices and the persistence of higher prices. The sustained higher oil and natural gas prices should themselves transmit a strong signal about the prevailing fundamentals for the supply and demand balance for these commodities.
Figure 3 shows that UK ended its brief era (lasting less than 3 decades) as a net oil exporter simultaneously with the start of the brisk growth in the (nominal) oil price.
The decline in UK’s oil production has been steeper than the decline in consumption thus requiring a growing need for imports to meet demand. This trend is now expected to continue.
As with oil UK wholesale natural gas prices rose steeply as UK transitioned from a few years with natural gas exports to a fast growing need for imports.
For the period January through June in 2013 the UK imported around 55% of its gas consumption (based upon data from DECC) and this portion is expected to grow in the future.
As for oil the decline in UK’s indigenous natural gas production has been steeper than its consumption thus making the UK increasingly reliant on growth in natural gas imports from increasingly more distant sources.
In 2012 the UK imported more than 70% of its coal consumption and coal was around 19% of UK’s total energy consumption versus barely 5% for renewables.
As the price developments in the previous 3 charts are in various volumes/weight units, figure 6 below shows how the nominal price developments for the 3 fossil fuels in the European market have developed when using Ton Oil Equivalents (TOE) as a metric.
The recent growth in North American natural gas supplies (from shale oil/gas) led several North American power companies to switch from coal to cheaper natural gas, thus leaving North American coal suppliers to look for other markets. Europe benefited thus from improved supplies of cheap coal in search for liquid customers.
Figure 6 illustrates the growing divergence in European fossil fuel prices in recent years. Because coal is now substantially cheaper than other energy sources, energy affordability issues are increasingly at odds with a desire to reduce greenhouse gas (GHG) emissions. Many consumers are price sensitive and will shop around for cheaper energy, and energy companies compete to meet these demands. The market will thus decide which fuel alternatives will power future economic activities.
A trade deficit reflects a higher consumption than production. The individual accounts involved are likely settled. To run a trade deficit requires the draw down of savings or taking on more public/private debt or combinations.
Absent trade surplus/balances and growing total debts will make long term imports of expensive energy financially demanding.
At one end of the political spectrum Labour, now in opposition, recently suggested some temporary cap on UK consumer energy prices. This would interfere with the market price mechanism.
On the other end the Conservatives claim that the price tag for meeting desired GHG reductions becomes costly for consumers and will also put UK’s industries at a competitive disadvantage.
The above may illustrate that higher energy prices are now receiving more political attention and hopefully this may lead to a wider acknowledgement that future energy supplies increasingly will have to come from more expensive and less accessible sources.
The present reality where any growth in future oil/natural gas supplies will have to come from costlier sources, simultaneously with a growing portion of the population experiencing diminishing abilities to afford those higher prices (thus risking growth for the portion of the population encompassed by the definition of “fuel poverty”), could point towards an emerging cycle with declining demand for expensive energy.
This happens as the energy companies take on more debt in an effort to grow supplies from more expensive sources to meet a projected demand growth.
Consumer affordability issues and thus trade realities will increasingly define the future for preferred energy sources. In Europe, coal is well-positioned to grow, thanks to its low price and availability.
Increased use of the world’s cheapest and most abundant fossil fuel, coal, contrasts any government’s desires for reducing GHG emissions (coal is the mad aunt in the attic!). The emerging (global) economic (debt) realities will continue to challenge any political desires to reduce GHG emissions when faced with the drive for economic growth (rock gets closer to the hard place!).
Presently many UK coal plants are up for retirement and it takes many years (nuclear plants even longer) to gain political acceptances, permitting, funding, construct and put new plants into operations.
So if the UK economy is to grow, and there have been (and likely still is) strong correlations between economic growth and energy consumption, this begs the question what energy sources will fuel the economic growth?
This may serve as an illustration that we apparently are at a crossroads about what “cheap” fuel to use for future economic activities.
The prospects for continued decline in the UK’s indigenous energy production, high energy (oil/natural gas) prices and high trade deficits are not sustainable and will reinforce the drive for a reduction of total costs for the UK energy imports.
This may also illustrate that we increasingly face schizophrenic decisions about how to price our natural environment.
How this develops has wide attention.