Bishop Hill The cost of greenery
Nov 14, 2014 Energy: grid In a footnote to the government's energy prices report the other day, was a link to something rather important: the fossil fuel price assumptions that the government uses. These were published back in September, but it's fair to say they are a long way out of date already.
- The 2014 prices for oil were given as (low, medium, high) $: 90.0 105.0 120.0 while the current price for oil is actually $80 (Brent crude).
- The 2014 prices for gas in pence per therm were: 47.5 55.8 64. Although not quite so bad as oil, these are not looking particularly clever against the current price of 51 pence per therm.
In terms of the future, the view seems to be that there will be a slow but steady increase in fossil fuel prices. This doesn't seem daft compared to, say, the NYMEX gas futures market, but it's certainly interesting to compare the current prices to earlier goverment predictions. Here are the 2012 graphs, to which I have added the current figures:
Having seen just how bad the predictions have been it's interesting to wonder who was behind them and how it was they appear to have missed the advent of the shale gas revolution, which is getting on for ten years old now.
It's also worth considering how fossil fuel prices so much lower than expected has affected the equation regarding how much money all those renewables are allegedly saving us.
Reader Comments (22)
'It's also worth considering how fossil fuel prices 40% or so lower than expected has affected the equation regarding how much money all those renewables are allegedly saving us.'
To which the answer is that renewables will save us diddly squat, but we already knew that didn't we? It's a pity that the likes of Davey and co will continue to ignore reality and force these monumental wastes of our money upon us.
Further proof of models' fallibility.
Typo? From $105 to $80 isn't "40% or so lower."
And to be fair, $105 *was* the average for the first 3 quarters of the year.
[Maths. On a Friday afternoon. Does not compute :-)]
The prices you quote for the futures don't include the tax the socialists will add to make sure oil remains expensive. :(
"Having seen just how bad the predictions have been it's interesting to wonder who was behind them..."
Maybe no surprise? If there was someone in government employ competent enough to make a good prediction, then perhaps they would probably be working for a hedge fund or an oil major by now.
Isn't that the ultimate cherry pick? Why not plot actual prices since 2010 instead of a single price point? It might reinforce your point, or it might not. But at least it would have some objective value instead of being a playground tease - "you said the price would go up and it has gone down, nah nah ne nah nah!"
Well, probably the authors were not privy to the scheme to bankrupt Russia. Once ther economy has tanked sufficiently and Putin has pulled out of Ukraine, prices will return to normal
There was an excellent article in last week's Economist, called "How to lie with indices". When I first saw it, I thought it was about climate science trickery, but it is actually a generic piece. Fits like a glove though.
Not sure if this'll work, but try this link if you don't have access to the original - http://tinyurl.com/mm7p5lk
I was pleased to see it referred to "How to lie with statistics". I remember reading that book at school in about 1965, enjoying it & finding a lifelong interest in maths, science and engineering. The downside is that I developed early onset BS allergy and a 3-step CDO mantra; "Show me the data. All of it. And show me what you did with it".
The book should be compulsory reading.
Saudi wants to destroy Iran, other Shia supporters such as Iraq and reduce the power of Russia. If the price of oil goes below $75/barrel for year, Iran is likely to collapse, investment in Iraq will slow down and Russia will be greatly weakened.
Te problem with the Greens is they lack an understanding of how the World actually works. A low oil price will benefit China and India. Saudi wants to reduce Iran's influence in the Middle East, Hizbolla and Hamas which will suit Israel nicely. A Saudi prince has said their position with regard to Iran is almost identical with Israel's.
IEA has predicted that oil price will fall next year (some other News Media have suggest it might even reach $70)
http://www.bbc.co.uk/news/business-30049294
It might be reasonable to assume that oil might remain low and stable for a few years.
What a mess Ed Miliband, Chris Huhne and Ed Davey have created?
This is a lovely example of why the IPCC offers 'projections', not predictions. The latter are falsifiable and have a nasty habit of being shown to be wrong on rather too many occasions.
Charlie,
Rather interestingly it seems some very high and very important contact is occurring shortly between Israel and Saudi Arabia.
Mailman
The original fossil fuel price assumptions made in the 2010 Pathway Analysis were even further adrift.
E.g.Oil (mid price) was assumed to increase from £71 to £81 (at 2009 prices) from 2010 to 2020.
(Say, $114 to $130).
And gas from 59p to 68p from 2010 to 2020.
We can add about 20% to adjust from 2009 to 2014 prices.
http://notalotofpeopleknowthat.wordpress.com/2014/11/02/government-underestimates-cost-of-decarbonisation/
After over 30 years in the oil and gas industry I learned one thing, any and all forecasts for future prices will be wrong. I remember forecasts of $200 per barrel oil by 2000 in the early1980's.
I have observed a constant mistaken assumption by the alternate energy industry, climate change alarmists, of status quo regards costs of production for fossil fuels with a further wrong assumption of price escalation due to reducing reserves.
Mike
S*** happens and it usually lands on the heads of climate change "experts".
Still they are so completely brainless and devoted to the "cause" they don't notice.
Sooner or later, though, they will have to. It's hard to breathe when you are covered with c***.
I have to corroborate Mike Singleton's comment on petroleum price forecasts. Obviously, any exploration/development project has to yield positive project economics before approval. These analyses are invariably subjected to a range of high low and expected future market prices along with a slew of other geological political and operational risk assumptions, construction and rig hire rates. Invariably, the future oil/gas market price viewed retrospectively a decade or two later is always wildly out. The only saving grace is that most competitor outfits use similar assumptions and make similar errors.
Price forecasting is bull, based on the pseudo-science of 'econometrics' and unjustified inductive reasoning, projected into a space where it is entirely inappropriate. As Peter Drucker says: "forecasting is not a respectable human activity, and not worthwhile beyond the shortest of periods". Likewise, JK Galbraith: "The only function of economic forecasting is to make astrology look respectable".
The EIA (a US energy agency) at least has the decency to archive all its past forecasts, so that one can see how consistently and grotesquely wrong they have been - and they've never much departed from 'consensus' views.
The commercial peddlers of price-forecasts make all manner of claims for the 'accuracy' of some highly selective examples of their past output: but also make sure never to let anyone see the full set of their past efforts, which are conclusive proof their 'methods' are crap. Anyone shelling out the requisite tens of thousands to buy one of said forecasts is greeted with a legal disclaimer (should they bother to read it) along the lines of "these numbers are a complete work of fiction and should on no account be trusted for any investment purpose". Their lawyers know the score.
The price of oil is to a substantial part a geopolitical issue, and has little to do with the cost of supply. The point is well made Nov 14, 2014 at 3:47 PM | Unregistered CommenterCharlie, and only the other day, I noted something similar although I consider that Saudi also considers that it is putting a squeeze on some US fracking, and that too is to their advantage.
Whilst in the last decade or so, some new players have come into the market who have relatively high costs of extraction, and some old wells are becoming more expensive to extract the last dregs, it should not be forgoten that in the late 1990s oil was trading at less than $20pbbl (in 1998/9 it was down to $16pbbl). Right through to 2005 it was trading at $50pbbl or less. At that time, all the then major players were making substantial profits, even though oil was trading at less than $50pbbl, so that clearly indicates that for the vast majority of oil reserves, oil will be profitable at $60/$70 pbbl. I accept that some new players such as Venezuela would not like such prices, but for the majority of players it would not cause a problems. It is geopolitics that has driven the cost of oil over $100pbbl (peaking at about $150pbbl). With political will it could be kept below $100pbbl, or even below $80pbbl long term, and this would have many economic benefits which would be a God send given the economic state of most of the developed nations..
I am no longer in the oil business but I imagine that there are huge problems with forward priced commitments. There must be numerous contracts being broken by players who have contracted to purchase supplies at say $108pbbl and can now go into the open marketand get the same at under $80pbbl. Such a substantial fall in proces over such a short period of time must be causing many a headache, and some companies may go bust or need to consolidate. I should imagine that the lawyers are raking it in.
Of course, very little electricity is generated by oil, and the fall in gas price, which is more relevant, has not been as stark. The cost of mass energy production should be dependent upon the cost of coal and gas, but the point is well made that DECC has probably over estimated the forward costs of fossil fuels. If Europe and the UK were to exploit their shale reserves, as they should be doing, this would be very apparent.Wind and Solar even with subsidies cannot compete and that is why energy costs both domestic and industrial are rising rapidly and will continue to do so until there is a pull back from so called green/renewables.
http://youtu.be/vu6637cjk8A
Here is a 2 minute video trailer for a new must read book - "The Moral Case for Fossil Fuels". It's worth a look-see
In Denmark one of the country's biggest firms, OW Bunker that supplies fuel oil to container ships, has just gone bankrupt after its Singapore office (in shades of Barings Bank) indulged in speculative trades based on the premise that oil prices were bound to rise.
OW Bunker Files U.S. Bankruptcy Days After Fraud Report
http://www.bloomberg.com/news/2014-11-13/ow-bunker-s-u-s-units-seek-bankruptcy-protection-correct-.html
In Britain the LibLabCon Party is trying to bankrupt the entire country on the same premise.
Marginally off-topic but relevant - near here (Cambridge) the A505 was closed yesterday due to a massive fire in a pile of WOOD CHIPS...
Wonder how long before that happens at Drax..?
As a Yank all I can say at the moment is: Ha, ha, ha, hardy ha, ha...fracking ha!