UK government's oil shock warning

A UK government minister is preparing for a coming global oil shock – a possible doubling of the price of oil.

As Monday’s UK Daily Telegraph newspaper reported, "Energy Secretary, Chris Huhne, told the Liberal Democrat conference last week that in a world facing economic "shocks" it was possible that the price of oil would double from its current level of about $75 a barrel and that he had ordered his officials to look at the impact of a Seventies-style oil price spike on the British economy."

According to Huhne (right), the UK government is creating an internal report on "what the impact. . . might be in terms of British business, businesses that have nothing to do with energy." This evaluation of the likely economic fallout of oil price volatility follows on from reports that the UK government has been "canvassing views from industry and the scientific community about peak oil," stated an August 2010 item in the Guardian newspaper. This stated that the Department of Energy and Climate Change was refusing to comply with a Freedom of Information request for peak oil "policy documents," possibly relating to a 2009 secret "peak oil workshop" involving government, Bank of England and Ministry of Defence officials.

A slew of reports published this year have pointed to a coming tightening of global oil supplies. I recently considered six reports written by groups as wide ranging as UK business leaders, the US military, insurers Lloyds, Kuwait University engineers, the German military and an Australian think tank. Taken as a whole they refer to aging oilfields, oil industry underinvestment, the limited output of unconventional sources such as oil sands, increasing global demand and the possibility of the world being close to peak oil, the geological natural maximum output. The point is, you don’t have to believe in peak oil theory to see a coming oil supply crunch. These reports didn’t all agree on the issue of peak, but nevertheless pointed to a supply crunch between 2011 and 2015.

Against this, the International Energy Agency is forecasting record world oil demand, and warning that the “era of cheap oil is over.”

It is no coincidence, then, that the leaders of China and Russia celebrated the completion of a 999-kilometer cross-border oil pipeline, on Monday. According to Xinhua, the official news agency of the government of the People's Republic of China: "The pipeline is part of a bilateral loan-for-oil deal reached in February 2009 between the two countries. Under the deal, China makes a $25-billion-long-term loan to Russia while Russia supplies China with 300 million tons of oil through pipelines from 2011 until 2030."

It’s a mutually beneficial relationship between the two countries. (Russian President Dmitry Medvedev and Chinese Vice President Xi Jinping pictured left.) Russia needs new markets for its crude exports and investment – while China’s growing energy requirements are clear for all to see. In March 2010 the New York Times reported that “Saudi Arabia exported more oil to China than to the United States last year,” and in July the Wall Street Journal announced that China had overtaken the United States to become the world’s number one energy consumer.

China’s oil imports were reportedly up 22.6 per cent, year-on-year, in the first eight months of 2010, with the entire Asia Pacific region predicted to increase its oil use "to around 30.21 million barrels per day by 2014." (It was 21.42 million barrels per day in 2001, and expected to be 27.15 in 2010.)

I'll look at the changing geopolitics of oil use in my next post.
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