R-Squared Energy Blog

Pure Energy

Britain’s Impending Energy Crisis

In case you missed the story yesterday in the Economist:

How long till the lights go out?

North Sea gas has served Britain well, but supply peaked in 1999. Since then the flow has fallen by half; by 2015 it will have dropped by two-thirds. By 2015 four of Britain’s ten nuclear stations will have shut and no new ones could be ready for years after that. As for coal, it is fiendishly dirty: Britain will be breaking just about every green promise it has ever made if it is using anything like as much as it does today. Renewable energy sources will help, but even if the wind and waves can be harnessed (and Britain has plenty of both), these on-off forces cannot easily replace more predictable gas, nuclear and coal power. There will be a shortfall—perhaps of as much as 20GW—which, if nothing radical is done, will have to be met from imported gas. A large chunk of it may come from Vladimir Putin’s deeply unreliable and corrupt Russia.

Many of Britain’s neighbours may find this rather amusing. Britain, the only big west European country that could have joined the oil producers’ club OPEC, the country that used to lecture the world about energy liberalisation, is heading towards South African-style power cuts, with homes and factories plunged intermittently into third-world darkness.

For more background on Britain’s situation, see also The looming electricity crunch.

I thought about these issues a lot when I lived in Scotland. Britain is clearly facing a crisis, and how they address it will be instructive to those of us who are concerned about energy shortages. I always said that Britain will ultimately conclude that they have to have a lot of new nuclear power, but it looks like that recognition won’t come in time to help them. So what’s the answer? They start ramping coal back up – breaking those green promises – or they start to suffer power outages. What do you think they will do? As I have said before, when the power starts to go out, environmental concerns will fly out the window. Sure, people like the idea of not burning coal. But will they give up power 6 hours a day to achieve that? I don’t think too many of them will.

Of course there is still natural gas from Russia, and I think they are going to have to roll the dice in the short term and hope Russia doesn’t hold them hostage. Longer term, LNG terminals would seem to make sense to me, but they don’t seem to be a part of the discussion here.

Ultimately, I think Britain will behave as the rest of the world will behave when faced with energy crunches. They will find that renewables can’t step up and fill the gap, and so they will roll out conservation measures and make do with whatever it takes to avoid crippling power outages: No matter if it takes coal, natural gas, or the blubber from baby seals. This is how I expect the world to respond when renewable dreams meet the reality of power shortages.

August 7, 2009 Posted by | coal, electricity usage, energy crisis, natural gas, Russia, Scotland, United Kingdom | 43 Comments

Fertilizer Shortages in the UK

I was pointed to an interesting discussion today about the possible impact the biofuels mandates are having in the UK:

Already paying the hidden cost of biofuels?

The complaint, originating in Wales, reads:

I know we are. This weekend I made inquires about ordering this year’s fertiliser for our holding.

The answer was, quite frankly, shocking. Our local supplier usually has a stock of 4,000 tonnes for local growers (we just want one tonne of that…).

This year, howewver, their total allocation is being pegged at 640 tonnes. The rest, it seems, has been shipped to the USA for the biofuel industry. The silos and bunkers are empty.

And, to add insult to injury, the meagre amount that the supplier has been left with has gone up by £100 a tonne over last year’s price.

I foresee near riots in the next couple of months at agricultural suppliers across the land.

And that’s not mentioning the cost of cereals. A poor harvest here and massive amounts of grain land being ploughed up for biofuel in North America has seen cereal prices shoot up.

As a result animal feed has gone up by a third, and I have heard one dealer predicting the £4 pint by the end of the year because of a shortage of barley. Already the major brewers are telling wholesalers to prepare for a 25 per cent hike in bottled beer prices by March.

It’s one aspect of the green fuel debate that may not have been aired much, but you can bet that it will become a major issue by the end of the summer.

In the beginning, it seemed like the entire ag sector was on the ethanol bandwagon. Then the cattle ranchers and chicken producers jumped off after their feed prices escalated. Now, looks like some overseas farmers may not be too happy (as evidenced by some of the other comments).

I don’t buy fertilizer, so I don’t really know. Anyone else have first hand knowledge of this issue? I have heard some suggest that China is also a factor, but I really don’t know how much their usage has increased.

January 17, 2008 Posted by | biofuels, fertilizer, United Kingdom | 10 Comments

Renewable Energy Tempts Workers

I saw an interesting little story today from The Glasgow Herald. I can’t find an online version, so here it is:

Renewable Energy Tempts Workers

By Mark Williamson

More than half of the skilled staff working in the oil and gas industry may be interested in switching to work for renewable energy, according to a survey which could heighten concerns about skills shortages for North Sea firms, writes Mark Williamson. In an online survey, Eden Scott found that 52% of respondents who were employed by oil and gas firms said that they had considered or were considering a move into the renewable energy sector.

The recruitment firm said almost one in five, 19%, of those respondents who were already working in the industry had come from oil and gas. The findings may concern North Sea industry leaders following repeated complaints that firms have been struggling to get enough skilled staff. Other sectors that had proved to be fertile sources for candidates for renewable energy companies included telecoms, aerospace, engineering, power generation, consultancy and nuclear.

Among people who said they were considering moving into renewable energy, some 71% said they thought the industry had good long-term prospects while 68% cited technical interest and 63% highlighted green concerns. Eden Scott said the number of jobs in renewable energy in Europe was predicted to increase from 30,000 to 200,000 across Europe in the next five years.

Interesting times ahead for the oil industry. I see the manpower shortage getting worse and worse, which is of course one of the issues leading to Peak Lite. Am I one of the 52% who has considered it? Of course. I have considered it several times.

I find LS9 appealing, but not living in California. Ditto for Tesla Motors. I found Range Fuels interesting (and I was talking to Vinod Khosla about this when my current assignment came up), but I didn’t want to live in Georgia. And I find Choren very intriguing, but don’t like the idea of living in Houston. (I also know some of the key Choren players, and they are quite a likeable bunch). I think all of the above have good prospects, yet each one had or has something that for me is a show-stopper. But I can see why people are drawn to the field.

November 28, 2007 Posted by | manpower, North Sea, Scotland, United Kingdom | 29 Comments

U.S. versus U.K. on Gasoline Prices

In the U.S., high gas prices tend to focus anger toward oil companies. In fact, as a reader recently pointed out, Shell’s CEO has even gotten death threats over the issue:

Oil CEO Receives Death Threats

But a letter I just read in a UK newspaper, Coventry Telegraph, shows that the ire here tends to be pointed at the tax man:

I WAS amazed to see the prices displayed at petrol stations – unleaded from 99.9p up to pounds 1.02 and diesel from pounds 1.01 up to pounds 1.09.

I am a self-employed plumber and my single biggest running cost is my van, most of which is down to tax – pounds 200 per year is in road tax, then you pay tax on your insurance, VAT on your MoT and repairs. I put about pounds 50 of diesel in my van everyweek, but pounds 37 of that is tax.

When petrol prices rise, the cost of delivering goods rises, the cost of running petrol-driven equipment on farms, building sites etc rises and, for me, the cost of getting to people’s homes rises.

After the last wave of petrol protests, it was evident that the government stuck two fingers up in our faces and we continued to accept paying the best part of just under pounds 1 for fuel. With these latest tax rises, along with the increase in oilprices, the government is pushing us all over the edge.

If the price of diesel has not fallen back below pounds 1 by the end of next weekend, I will be protesting at my local petrol station on the Monday morning and would urge everyone out there to make the same stance against the extortionate amount of tax we pay on our fuel.

Colin Goode, Courtland Avenue, Coundon.

I look at the U.K. as a sort of test case of what will happen in the U.S. as gas prices continue to escalate. As someone recently said to me, “Well, when gasoline gets to $5/gallon, biofuels will really start to come on.” I had to point out that we are paying $8/gallon in the U.K., and biofuels aren’t making a dent. I think you will find the same is true in the U.S. Even at $8/gallon, a lot of alternatives will struggle to compete because they have such high fossil fuel inputs. And what the man described above – higher gas prices rippling through the economy – will happen, and is starting to happen in the U.S. I think it is only going to get worse.

Of course there is a huge difference between the amount of gas tax paid in the U.S. and the U.K. Oil companies are not reaping nearly the windfall of governments here in the U.K. But, I also don’t think most people in the U.S. realize that the U.S. federal and state governments generally reap greater returns from fossil fuel sales than do oil companies. On gasoline alone, the average tax is $0.42/gallon, which amounts to about $60 billion in revenues each year. Now, I don’t favor lowering gas taxes – in fact I favor the opposite to spur conservation. But the different attitudes between the two countries on the issue of high gas prices is stark.

November 17, 2007 Posted by | energy policy, gas prices, oil prices, politics, United Kingdom | 38 Comments

Renewable Energy: “Expensive and Impractical”

At least that’s the conclusion of the present government in the UK:

Labour’s plan to abandon renewable energy targets

Ministers are planning a U-turn on Britain’s pledges to combat climate change that “effectively abolishes” its targets to rapidly expand the use of renewable energy sources such as wind and solar power.

Leaked documents seen by the Guardian show that Gordon Brown will be advised today that the target Tony Blair signed up to this year for 20% of all European energy to come from renewable sources by 2020 is expensive and faces “severe practical difficulties”.

According to the papers, John Hutton, the secretary of state for business, will tell Mr. Brown that Britain should work with Poland and other governments sceptical about climate change to “help persuade” German chancellor Angela Merkel and others to set lower renewable targets, before binding commitments are framed in December.

Of course it is expensive. Not many energy sources can compete with fossil fuels on a purely economic basis. But we can’t go on like this forever. Either we manage to make the difficult (and probably expensive) decisions required to move away from fossil fuels, or we will simply find ourselves at the mercy of events outside our control. My preference is for a planned transition, even if it is difficult.

October 23, 2007 Posted by | energy policy, global warming, United Kingdom | 19 Comments

Renewable Energy: “Expensive and Impractical”

At least that’s the conclusion of the present government in the UK:

Labour’s plan to abandon renewable energy targets

Ministers are planning a U-turn on Britain’s pledges to combat climate change that “effectively abolishes” its targets to rapidly expand the use of renewable energy sources such as wind and solar power.

Leaked documents seen by the Guardian show that Gordon Brown will be advised today that the target Tony Blair signed up to this year for 20% of all European energy to come from renewable sources by 2020 is expensive and faces “severe practical difficulties”.

According to the papers, John Hutton, the secretary of state for business, will tell Mr. Brown that Britain should work with Poland and other governments sceptical about climate change to “help persuade” German chancellor Angela Merkel and others to set lower renewable targets, before binding commitments are framed in December.

Of course it is expensive. Not many energy sources can compete with fossil fuels on a purely economic basis. But we can’t go on like this forever. Either we manage to make the difficult (and probably expensive) decisions required to move away from fossil fuels, or we will simply find ourselves at the mercy of events outside our control. My preference is for a planned transition, even if it is difficult.

October 23, 2007 Posted by | energy policy, global warming, United Kingdom | Comments Off on Renewable Energy: “Expensive and Impractical”

What It Takes to Be Carbon Neutral

A popular newspaper in Scotland, The Scotsman, has detailed what it will take for Britain to be carbon neutral within 20 years. I have said before that despite Al Gore’s pleas, despite the awareness and scientific consensus on Global Warming, I do not see the world become carbon neutral as long as there are fossil fuels left to burn. Some highlights from the article drive that point home:

Green Future Demands a Radical Shift in Lifestyles for British

Meat-free menus, battery-operated cars and an end to affordable flights.

These are among the radical visions outlined in a report which says Britain could be carbon neutral within 20 years – but only if major steps are taken to change our lifestyles.

Tumble-dryers would disappear and an “armada” of wind turbines would need to be built around the coast to achieve the goal, says the research by scientists from the Centre for Alternative Technology (CAT).

But there is scepticism as to whether any of the scenarios suggested in the report are achievable.

CAT says achieving such a drastic cut in emissions is possible and may be the only way to tackle climate change.

Paul Allen, CAT’s development director, said: “What we are saying is that we need a huge programme, a bit like the US space project in the Sixties.

Now, for some details:

Among the major effects would be that electric, battery-operated cars would quickly overtake use of the internal combustion engine. Households would be forced to invest in ways to make their homes energy efficient, and switch from gas to biofuels or renewable electricity.

But there would also be “negative” effects in terms of the lifestyle that people enjoy. Air travel would become far too expensive unless the industry “pulls something out of the hat” and finds a green fuel.

And the diet of the country would have to change to include much more organically-grown, locally-produced vegetables, and less meat.

The result of the new “carbon economics” would be to cut energy use by half, and this new demand would then be met entirely by a green supply.

Tens of thousands of wind turbines would be built, mainly around Britain’s shores, to provide 50 per cent of the country’s new energy needs. The rest would come from a combination of biofuel “combined heat and power” stations, wave power, hydroelectricity and tidal schemes.

Is that realistic? Tens of thousands of wind turbines. An end to air travel. Fewer steaks. Is it achievable? It may be achievable in a dictatorship, but not realistic in a democracy. People are not going to accept those consequences unless they are forced to.

Also note that this is only for Great Britain, whose 60 million population is 1/5th that of the U.S. Furthermore, consider that UK citizens already only use half the per capita energy usage of the average U.S. citizen, and it soon becomes clear that carbon neutrality for the U.S., or the world, is a pipe dream. All of the Live Earth concerts in the world aren’t going to change that. Carbon dioxide concentrations will continue to climb, and the outcome of this atmospheric experiment is uncertain.

Incidentally, there are a number of reader comments following the original article. If you think there is any possibility of realizing such a scheme, a quick review of the comments should put that notion to rest.

July 9, 2007 Posted by | Al Gore, global warming, United Kingdom | 10 Comments

What It Takes to Be Carbon Neutral

A popular newspaper in Scotland, The Scotsman, has detailed what it will take for Britain to be carbon neutral within 20 years. I have said before that despite Al Gore’s pleas, despite the awareness and scientific consensus on Global Warming, I do not see the world becoming carbon neutral as long as there are fossil fuels left to burn. Some highlights from the article drive that point home:

Green Future Demands a Radical Shift in Lifestyles for British

Meat-free menus, battery-operated cars and an end to affordable flights.

These are among the radical visions outlined in a report which says Britain could be carbon neutral within 20 years – but only if major steps are taken to change our lifestyles.

Tumble-dryers would disappear and an “armada” of wind turbines would need to be built around the coast to achieve the goal, says the research by scientists from the Centre for Alternative Technology (CAT).

But there is scepticism as to whether any of the scenarios suggested in the report are achievable.

CAT says achieving such a drastic cut in emissions is possible and may be the only way to tackle climate change.

Paul Allen, CAT’s development director, said: “What we are saying is that we need a huge programme, a bit like the US space project in the Sixties.

Now, for some details:

Among the major effects would be that electric, battery-operated cars would quickly overtake use of the internal combustion engine. Households would be forced to invest in ways to make their homes energy efficient, and switch from gas to biofuels or renewable electricity.

But there would also be “negative” effects in terms of the lifestyle that people enjoy. Air travel would become far too expensive unless the industry “pulls something out of the hat” and finds a green fuel.

And the diet of the country would have to change to include much more organically-grown, locally-produced vegetables, and less meat.

The result of the new “carbon economics” would be to cut energy use by half, and this new demand would then be met entirely by a green supply.

Tens of thousands of wind turbines would be built, mainly around Britain’s shores, to provide 50 per cent of the country’s new energy needs. The rest would come from a combination of biofuel “combined heat and power” stations, wave power, hydroelectricity and tidal schemes.

Is that realistic? Tens of thousands of wind turbines. An end to air travel. Fewer steaks. Is it achievable? It may be achievable in a dictatorship, but not realistic in a democracy. People are not going to accept those consequences unless they are forced to.

Also note that this is only for Great Britain, whose 60 million population is 1/5th that of the U.S. Furthermore, consider that UK citizens already only use half the per capita energy usage of the average U.S. citizen, and it soon becomes clear that carbon neutrality for the U.S., or the world, is a pipe dream. All of the Live Earth concerts in the world aren’t going to change that. Carbon dioxide concentrations will continue to climb, and the outcome of this atmospheric experiment is uncertain.

Incidentally, there are a number of reader comments following the original article. If you think there is any possibility of realizing such a scheme, a quick review of the comments should put that notion to rest. I think it is a good plan, but I don’t think it has a chance of being implemented.

July 9, 2007 Posted by | Al Gore, global warming, United Kingdom | 6 Comments

Windfall Profits: A Lesson from the U.K.

Regardless of your position on windfall profits taxes on oil companies, one thing has been demonstrated again and again. Governments consistently fail to accurately anticipate the consequences. As oil prices have increased, governments have seen tax revenues from oil and gas grow significantly. But they apparently believe they know how to deal with a goose that lays golden eggs: Take some food away from that corpulent goose, but expect it to keep laying golden eggs.

The purpose for imposing windfall profits taxes is generally two-fold. First, a government can tell the citizens that despite their inability to control oil and gas prices, they are doing something by “punishing” the oil companies that benefit from these rising prices. Second, they genuinely see it as a rich source of revenue that they can squeeze without consequence. They think the only real people who will be affected are those who are directly involved with oil and gas companies.

History has shown again and again that this viewpoint is inaccurate. That hasn’t stopped recent attempts in California, with Proposition 87, and current attempts in Wisconsin to again try dipping into this “consequence-free” pot of money. While I favor the direct approach – tax oil and gas on the consumption side – recent attempts have focused on taxing it on the production side, while writing into the legislation provisions to prevent costs from trickling down to consumers. I have previously noted the stunning naivety of this approach, and that these attempts are destined for failure.

It turns out that we now have another example to add to the list in which politicians inaccurately gauged the consequences. The story more or less starts right after Hurricane Katrina. U.K. Chancellor and soon-to-be Prime Minister Gordon Brown detailed what he believed needed to be done to bring down gas prices:

Brown calls for oil price effort

Chancellor Gordon Brown has called for a “concerted effort” by oil-producing countries to bring down prices – but is not offering to cut taxes on petrol.

Ahead of expected fuel duty protests, Mr Brown told the TUC Opec countries to produce more oil and refine more.

Mr Brown called for more worldwide investment in refineries and alternative energies.

So, he told OPEC to produce more oil. I bet they got right on that. The last statement is the most interesting, in light of the move that Brown made just a few months later:

Brown doubles North Sea oil tax

Chancellor Gordon Brown has announced a rise in the tax levied on North Sea oil producers in the wake of record crude prices. Under the measure, the government’s supplementary charge on energy companies will rise to 20% from 10%.

Mr Brown also said there would be no further rises in the North Sea oil tax during this parliament.

Meanwhile, the extra revenue raised would be used to “help consumers most affected by the significant increases in global oil and energy prices” such as pensioner households, the government said.

“Governments levy taxes and we will do what we have to,” said a BP spokesman. “But any extra tax that we pay is money that is no longer available for investment in North Sea oil and gas fields.”

So, Brown called for more investment, and then doubled the surcharge (bringing the total corporate tax rate for oil companies to 50%). I guess he thought he would sit back and watch the revenues come rolling in, and then use those revenues to help consumers affected by higher energy prices. But not only do you discourage investment with these sorts of moves, rising oil prices also increase the costs of everything associated with the oil business. I could have told him that while his strategy might work in the very short term, it would certainly be akin to cutting a research budget: Short term gain, with often longer term consequences.

Brown’s reality checks have started to arrive. In a prescient article written in February 2007, Shadow Chancellor George Osborne got to the crux of the matter:

Gordon Brown is squandering North Sea oil assets

By squeezing the maximum amount of tax revenue from Britain’s oil and gas assets, Gordon Brown is putting further offshore investment at risk, George Osborne has warned.

Accusing the Treasury of failing to understand that the UK Continental Shelf is a mature resource competing for investment in a fiercely competitive global market, he went on: “They don’t recognise that investment in the North Sea cannot be taken for granted when there are potentially more profitable opportunities in West Africa, Mexico or Brazil.

In short, Gordon Brown risks denying future generations the benefits our generation has enjoyed from the North Sea. He’s more interested in cash today than investment tomorrow. The result is that Britain’s North Sea inheritance is in danger of being squandered.”

Last week, the treasury announced that things weren’t working out as forecast:

North Sea Revenues Drying Up

Source: Daily Mail; London (UK)

Publication date: 2007-03-22

BRIAN O’CONNOR

The Treasury is nursing a Pounds 5bn shortfall in North Sea oil and gas revenues after a sharp rise in tax rates failed to bring in the targeted result. North Sea revenues for 2006/7 were only Pounds 8bn, against a projected Pounds 13bn. Though North Sea production is declining, the fall cannot be explained by this alone. The UK Offshore Operators Association (UKOOA) says the Treasury did not foresee that a rise in crude oil prices would be followed by a sharp rise in costs as the industry scrambled for drilling rigs, skilled workers and specialist equipment.

Surprise! Thus is the short-sightedness of our political leaders.

Brown has admitted that things didn’t work out as planned, but blamed “factors outside the government’s control”:

‘Brown playing games on oil’

Falling North Sea oil revenues will force the government to borrow more than expected, it emerged today, drawing accusations of “panic” from opposition politicians.

Gordon Brown argued in an interview that borrowing remained on a downward trend but added: “What has changed our forecast is what happened to North Sea revenues.”

Mr Brown said North Sea oil revenues would be £5.5bn lower than expected for 2007/08 but argued that the reduction was due to factors outside the government’s control. “That’s no fault of the government. It’s lower production from the North Sea. We have to take that into account,” Mr Brown told the BBC’s Today programme.

No fault of the government? Again, read George Osbourne’s words above. Investment in the North Sea is affected by the tax rates. You have taken money away that could have gone into new investments and diverted it. So, even though North Sea production is in decline, these policies will accelerate that decline by discouraging new investments.

As I said, I support higher gas taxes. That is not my issue at all. My issue is that these politicians have an incredibly naive view and believe they can increase these taxes with no fallout on anyone but the oil companies. Time and time again they see this as a quick fix to budgetary issues, while pandering to a constituency outraged at higher energy prices. It’s just that it never works out they way they thought it would. But I’m sure that won’t stop them from trying again.

March 25, 2007 Posted by | gas tax, politics, price gouging, United Kingdom, windfall profits | 20 Comments

Windfall Profits: A Lesson from the U.K.

Regardless of your position on windfall profits taxes on oil companies, one thing has been demonstrated again and again. Governments consistently fail to accurately anticipate the consequences. As oil prices have increased, governments have seen tax revenues from oil and gas grow significantly. But they apparently believe they know how to deal with a goose that lays golden eggs: Take some food away from that corpulent goose, but expect it to keep laying golden eggs.

The purpose for imposing windfall profits taxes is generally two-fold. First, a government can tell the citizens that despite their inability to control oil and gas prices, they are doing something by “punishing” the oil companies that benefit from these rising prices. Second, they genuinely see it as a rich source of revenue that they can squeeze without consequence. They think the only real people who will be affected are those who are directly involved with oil and gas companies.

History has shown again and again that this viewpoint is inaccurate. That hasn’t stopped recent attempts in California, with Proposition 87, and current attempts in Wisconsin to again try dipping into this “consequence-free” pot of money. While I favor the direct approach – tax oil and gas on the consumption side – recent attempts have focused on taxing it on the production side, while writing into the legislation provisions to prevent costs from trickling down to consumers. I have previously noted the stunning naivety of this approach, and that these attempts are destined for failure.

It turns out that we now have another example to add to the list in which politicians inaccurately gauged the consequences. The story more or less starts right after Hurricane Katrina. U.K. Chancellor and soon-to-be Prime Minister Gordon Brown detailed what he believed needed to be done to bring down gas prices:

Brown calls for oil price effort

Chancellor Gordon Brown has called for a “concerted effort” by oil-producing countries to bring down prices – but is not offering to cut taxes on petrol.

Ahead of expected fuel duty protests, Mr Brown told the TUC Opec countries to produce more oil and refine more.

Mr Brown called for more worldwide investment in refineries and alternative energies.

So, he told OPEC to produce more oil. I bet they got right on that. The last statement is the most interesting, in light of the move that Brown made just a few months later:

Brown doubles North Sea oil tax

Chancellor Gordon Brown has announced a rise in the tax levied on North Sea oil producers in the wake of record crude prices. Under the measure, the government’s supplementary charge on energy companies will rise to 20% from 10%.

Mr Brown also said there would be no further rises in the North Sea oil tax during this parliament.

Meanwhile, the extra revenue raised would be used to “help consumers most affected by the significant increases in global oil and energy prices” such as pensioner households, the government said.

“Governments levy taxes and we will do what we have to,” said a BP spokesman. “But any extra tax that we pay is money that is no longer available for investment in North Sea oil and gas fields.”

So, Brown called for more investment, and then doubled the surcharge (bringing the total corporate tax rate for oil companies to 50%). I guess he thought he would sit back and watch the revenues come rolling in, and then use those revenues to help consumers affected by higher energy prices. But not only do you discourage investment with these sorts of moves, rising oil prices also increase the costs of everything associated with the oil business. I could have told him that while his strategy might work in the very short term, it would certainly be akin to cutting a research budget: Short term gain, with often longer term consequences.

Brown’s reality checks have started to arrive. In a prescient article written in February 2007, Shadow Chancellor George Osborne got to the crux of the matter:

Gordon Brown is squandering North Sea oil assets

By squeezing the maximum amount of tax revenue from Britain’s oil and gas assets, Gordon Brown is putting further offshore investment at risk, George Osborne has warned.

Accusing the Treasury of failing to understand that the UK Continental Shelf is a mature resource competing for investment in a fiercely competitive global market, he went on: “They don’t recognise that investment in the North Sea cannot be taken for granted when there are potentially more profitable opportunities in West Africa, Mexico or Brazil.

In short, Gordon Brown risks denying future generations the benefits our generation has enjoyed from the North Sea. He’s more interested in cash today than investment tomorrow. The result is that Britain’s North Sea inheritance is in danger of being squandered.”

Last week, the treasury announced that things weren’t working out as forecast:

North Sea Revenues Drying Up

Source: Daily Mail; London (UK)

Publication date: 2007-03-22

BRIAN O’CONNOR

The Treasury is nursing a Pounds 5bn shortfall in North Sea oil and gas revenues after a sharp rise in tax rates failed to bring in the targeted result. North Sea revenues for 2006/7 were only Pounds 8bn, against a projected Pounds 13bn. Though North Sea production is declining, the fall cannot be explained by this alone. The UK Offshore Operators Association (UKOOA) says the Treasury did not foresee that a rise in crude oil prices would be followed by a sharp rise in costs as the industry scrambled for drilling rigs, skilled workers and specialist equipment.

Surprise! Thus is the short-sightedness of our political leaders.

Brown has admitted that things didn’t work out as planned, but blamed “factors outside the government’s control”:

‘Brown playing games on oil’

Falling North Sea oil revenues will force the government to borrow more than expected, it emerged today, drawing accusations of “panic” from opposition politicians.

Gordon Brown argued in an interview that borrowing remained on a downward trend but added: “What has changed our forecast is what happened to North Sea revenues.”

Mr Brown said North Sea oil revenues would be £5.5bn lower than expected for 2007/08 but argued that the reduction was due to factors outside the government’s control. “That’s no fault of the government. It’s lower production from the North Sea. We have to take that into account,” Mr Brown told the BBC’s Today programme.

No fault of the government? Again, read George Osbourne’s words above. Investment in the North Sea is affected by the tax rates. You have taken money away that could have gone into new investments and diverted it. So, even though North Sea production is in decline, these policies will accelerate that decline by discouraging new investments.

As I said, I support higher gas taxes. That is not my issue at all. My issue is that these politicians have an incredibly naive view and believe they can increase these taxes with no fallout on anyone but the oil companies. Time and time again they see this as a quick fix to budgetary issues, while pandering to a constituency outraged at higher energy prices. It’s just that it never works out they way they thought it would. But I’m sure that won’t stop them from trying again.

March 25, 2007 Posted by | gas tax, politics, price gouging, United Kingdom, windfall profits | 10 Comments