Oil’s long reach

The more I think about the halving of the oil price, the more significant it seems. The scale of the change makes it difficult for commentators and forecasters to think it all through and understand the magnitude of what has happened so far. There is reluctance to simply assume that in future oil revenues will be under half the levels of last year. Prices might go up again. Some of the oil is under long term contract or special arrangements which may limit the price damage a bit. Some of the industry’s commitments to put in new investments and sustain programmes of maintenance and development cannot be easily cancelled in the short term.

However, until the price rises again the safe assumption to make is that oil revenues will be well down. This means the cancellation of a large number of new projects to find and exploit oil in places where it is dear to find it and get it out. It makes the development of shale gas provinces in Europe a less immediate prospect. It means delays and cancellations to new projects in the USA. It means bankruptcies or refinancings of projects recently completed in high cost areas. It means a gradual reduction in future output to bring the market back into balance, barring some crisis to the output of one or more of the major oil producing countries or areas. Banks may need some of their new reserves to deal with extraordinary losses on oil financings.

It also means sharp contraction in state oil revenues. This will be most marked in Venezuela, already struggling with debt problems, and in Russia where oil dependence by the state is high. It also changes the once easy budget positions of various Middle Eastern countries, who have started to spend up to the revenues that oil at over $100 a barrel gave them. It will cut the oil based revenues in the UK more rapidly than the decline in output was already doing. Do not expect any PRT revenue now, and expect a big fall in oil based corporation tax receipts in a year or so. Scotland’s contribtion to UK revenues has just taken a large knock, just a few weeks after the SNP assured the people of Scotland that Scottish oil could buy them a better future.

The bad news for the few is offset for the world by the good news for the many. This level of price fall is a big boost to the large consumers like China, Japan, India and the Euro area. It takes the inflation pressure off as well, allowing easier money for longer. In the UK it is good news for the government. Although the government cannot claim it brought about the price fall by its actions, government gets blamed for anything that goes wrong on its watch and gets some benefit from what goes right, even where it is not the cause. Labour’s cost of living campaign does not look on the money now real wages are rising. Petrol at a little over £1 a litre- maybe soon at below £1 a litre – is a great refutation of Labour’s crisis talk. The banks may lose more on energy accounts, but some of their other loans may now be easier to service and refinance as many companies benefit from lower energy prices.

Overall this is good news for the world economy and good news for the real incomes of many.However, if these prices persist we should not underestimate the possible damage to the energy sector. They face, at least temporarily, the prospect of income cuts, job losses, and refinancings as they struggle to rebalance their busiensses at very different price levels.It will also change the balance between nations, putting Russia under more severe financial pressure and reducing the incomes of the Middle East.

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73 Comments

  1. formula57
    Posted January 18, 2015 at 6:51 am | Permalink

    The price change may well have a large impact but let us recall that the oil price was around these levels only some 10 years ago and 30 years ago, having been lower in the intervening 20 years.

    Let us also take a moment to lament the continued presence of Scotland in our Union, now contributing even less for its unfair share. Another triumph for the political class.

    • Lifelogic
      Posted January 18, 2015 at 12:43 pm | Permalink

      A fair deal for England, selective immigration, lower taxes and cheaper energy should be the corner stones of Cameron election strategy but alas he is Cameron and seems to want to lose again. After all the Tories are essentially just an English party now, what little is left of them.

    • Denis Cooper
      Posted January 18, 2015 at 1:43 pm | Permalink

      I’d rather have Scotland in our Union than have it as a nominally independent sovereign state but in reality the client state of a hostile foreign power.

      • Mark B
        Posted January 18, 2015 at 6:48 pm | Permalink

        The EU is the sum of its parts. And the only parts that are worth anything are:
        Germany
        France (politically speaking)
        Netherlands
        UK
        Netherlands

        The rest are either borderline or a downright liability. But without the UK and Germany, its kaput !

        • Denis Cooper
          Posted January 19, 2015 at 9:47 am | Permalink

          In this context the Union is the British, not the European, Union.

        • A different Simon
          Posted January 19, 2015 at 11:51 am | Permalink

          Italy was a major industrial power until quite recently .

          What they do best is produce well designed and properly manufactured quality goods be it clothes or agricultural equipment or whatever .

          Too many of their brands , like our own , seem to have made the mistake of offshoring . When this happens the brand appeal is lost .

          It’s hard to see any future for Italy until quality comes back into vogue . Currently disfunctional markets first , second and third criteria is price .

          There is something very wrong with the wider world when a country like Italy is not doing better than it is .

      • lojolondon
        Posted January 18, 2015 at 6:59 pm | Permalink

        I would rather have Scotland out of our union, than brokering a deal with the second-biggest party to run the country in return for giving them everything they ever wanted courtesy of MR-negotiation – Miliband. Think about it.

        • Denis Cooper
          Posted January 19, 2015 at 10:23 am | Permalink

          Right, I’ve thought about it, and I’ve decided that I’d rather have Miliband in No 10 for a few years than have Scotland out of the Union in perpetuity. It’s not even as if the obvious alternative to Miliband would be so much better that it would be worth breaking up the country to get him re-installed as Prime Minister, even if that was a possibility at the next election which it won’t be.

      • William Gruff
        Posted January 18, 2015 at 7:19 pm | Permalink

        Denis Cooper:

        Not that old chestnut again.

        We’ve moved on considerably since the days when a rabble of Highlanders and a few Italian followers of the grandson of a discredited and deposed king could threaten trouble in England.

        That notwithstanding, do you seriously think the Scotch, whose martial worth has been very seriously overstated and who cannot stand playing second fiddle, could take orders from the Russians or the Chinese?

        The idea of Scotland posing a military or economic threat to England is laughable.

        England needs to rid itself of the wholly unnecessary burden that is Scotland, and the rest of the ‘United’ Kingdom.

        Here’s to independence for England and good riddance to Scotland.

        • Denis Cooper
          Posted January 19, 2015 at 10:29 am | Permalink

          As you’re so good at predicting the future, and can see so clearly that it could never again be any kind of problem for England to share its home island with a foreign country free to make its own alliances with whatever other foreign countries it chose, I’d be very grateful if you could lend me your crystal ball so that I can make a few financially lucrative predictions for myself.

          I suppose you do realise that even if Scotland reverted to being an independent sovereign state it would still be there attached to the north of England, it wouldn’t be separated and towed away?

          • William Gruff
            Posted January 20, 2015 at 1:38 am | Permalink

            Denis Cooper:

            What could you possibly do with my ‘crystal ball’, gazing, resolutely as you are, inwards and backwards?

            That Scotland remains ‘attached’ to England is of no consequence whatsoever. Warfare has always been an economic activity (the Vikings were simply ‘blue collar guys’ making a living) and in these digitally electronic days economic warfare is very easily prosecuted from anywhere on the planet, or a satellite orbiting it, or the moon or Mars.

            Robots, controlled by women in far away places, and genetic warfare will very soon make men on the ground doing dirty and dangerous work with expensive and messy weapons a thing of the past.

            No one needs Scotland, now or in the future, least of we English.

          • Denis Cooper
            Posted January 21, 2015 at 11:01 am | Permalink

            “Those who fail to learn from history are doomed to repeat it”.

          • William Gruff
            Posted January 21, 2015 at 11:39 pm | Permalink

            I promise our host that this is my last post in this thread.

            Denis Cooper:

            Those who fail to learn from history are doomed to repeat it.

            Had you learned anything from ‘history’ (Have you studied history?) you might have learned that quoting those who were not historians is not the mark of an historian, though it used once to be typical of a precocious first year undergraduate.

            That aside, history is not what happened in the past but what historians argue about what happened in the past. Thus nothing absolute that is worth learning from can be learned from history.

            That aside, is that all you can offer?

      • APL
        Posted January 18, 2015 at 8:59 pm | Permalink

        Denis Cooper: “but in reality the client state of a hostile foreign power.”

        To frustrate the possibility of that situation was of course the original benefit of the Union for England.

        • Denis Cooper
          Posted January 19, 2015 at 10:31 am | Permalink

          And it has done that essential job for England for three centuries.

      • bluedog
        Posted January 18, 2015 at 9:28 pm | Permalink

        Exactly, Denis Cooper. Those in England who advocate an ‘independent’ Scotland have not understood English history.

        • Denis Cooper
          Posted January 19, 2015 at 10:40 am | Permalink

          If they have understood it, and yet they still want Scotland to revert to being an independent sovereign state, then they cannot have the real long term interests of England and the English at heart. Even more so if they also want the same thing to happen with Wales, so that England would have land borders with two foreign countries. That would serve well as a plan devised by the enemies of England to weaken it and bring about its downfall, and it should not be one supported by any true Englishman.

  2. Lifelogic
    Posted January 18, 2015 at 8:10 am | Permalink

    Indeed good news on balance but it will not last that long I suspect. When will be the time of buy into oil companies again I wonder? Cheaper fuel will mean more much demand for road space, investment in which has been lamentable for years. Much of this “investment” has idiotically been directed toward blocking them rather then getting them to flow.

    Cheaper oil makes Cameron/Huhne/Davey’s absurdly uneconomic taxpayer subsidised “investments” in greencrap (PV, biomass and wind) even more absurd. We should stop all these subsidies now (both new and the existing ones). I have little sympathy for investors in the existing ones, those involved must have know they were economically indefensible without absurd & pointless taxpayer subsidies and government rigging of the energy market.

    The wholesale price of diesel (before the huge government tax grab) is only about 28p a litre. If they stopped their idiotic green crap subsidies perhaps they would not need to tax so excessively (currently about the highest tax rates in the very overtaxed EU).

  3. Mark B
    Posted January 18, 2015 at 8:26 am | Permalink

    Good morning.

    I do not think that business and consumers would necessarily get lower energy prices. At the ‘pumps’ yes, but not elsewhere. This is because providers of gas buy their fuel well a head.

    One thing that our kind host does not touch on, is what this means to the expensively subsidised and unreliable renewable energy market. With cheaper gas, oil, and coal; surely this means that renewable’s cannot be a realistic proposition. This is especially true as he government has made fossil fuels deliberately expensive due to the Climate Change Act and, Ed Davey and the Chancellor being tasked to reduce taxation on them. How can any government which claims to be going green, be seen to give tax concessions to CO2 producers. The hypocrisy of it !

    Governments should not be interfering in markets. They should only insure that markets are open, honest and competitive. Labour’s planned priced controls and its desire to control markets and have a planned economy are proving to be ruinous and this coalition government is little better.

    Leave well alone I say.

  4. alan jutson
    Posted January 18, 2015 at 8:47 am | Permalink

    Mr Salmond has been silent of late, I wonder why ?

    Perhaps he is reflecting on how great a deal he got for Scotland with more promises of more money being pumped into his Nationalist heartland from the rest of the UK taxpayers.

    He now looks like a bigger winner, than when he lost.

    Some credit must go to George Osbourne for scrapping labours fuel escalator tax, so I hope he is not thinking of putting up the tax rate on fuel just because it costs rather less at the moment, which is probably a short term price phenomenon anyway.

    • Lifelogic
      Posted January 18, 2015 at 2:00 pm | Permalink

      Perhaps, given the large fall in the oil price, we should take the opportunity to amend the last minute panic promises that Cameron, Clegg, Miliband and Brown gave. They were given without any authority from the English voters (the people who will have to fund them) and are thus totally invalid.

      The English it seems are rarely asked about anything it seems, they are just there to pay the bills.

      • fedupsouthener
        Posted January 18, 2015 at 6:08 pm | Permalink

        Too true! We are being milked like cash cows!

      • Mark B
        Posted January 18, 2015 at 6:52 pm | Permalink

        They are totally valid. Parliament rolled over and allowed them to tickle its tummy. The English elected MP’s could have rejected it, but that would have meant putting their constituency and their country (England) before party and their careers. No contest.

        • Denis Cooper
          Posted January 19, 2015 at 10:56 am | Permalink

          Before then Parliament could have refused to allow the SNP to set the terms of the referendum, including the franchise, and refused to allow the SNP to run the referendum and use public resources which had been made available to the Scottish Parliament and government specifically for devolved purposes to instead advocate independence, but Parliament had rolled over on that.

  5. Posted January 18, 2015 at 9:02 am | Permalink

    Oil when excavated makes it’s own waves .Certainly oil and water don’t mix much like the need for fuel and the violence and corruption associated with it. India definately needs a boost in its development programme and English firms associated with the rebuilding process will benefit from this.

    • Posted January 18, 2015 at 6:16 pm | Permalink

      I must be finite about this….’definitely.’

      I usually await everyone else’s comments before i find someone else who is puzzled by the same thing as myself . In this case it is Dennis who asks the question, Why have oil prices halved?

  6. Richard1
    Posted January 18, 2015 at 9:34 am | Permalink

    Another significant factor is the effect on the economics of green crap. Let’s remember that when green politicians such as Mr Davey assure us that renewables will be cost competitive at some future point they do so on the assumption that the price of oil would forever rise. With oil at this price wind and solar power is even more absurdly uneconomic in the UK than it was when this and the previous govt sanctioned all those wasteful subsidies. (I haven’t heard such an assurance from a minister or green campaigner since before oil fell below $100. Time for a Parliamentary question?)

    As you point out the Scottish separtists’ economic numbers are shot to pieces. Had we had this oil price a few months earlier it is difficult to see the separatists getting more than 25-30% in the referendum.

    • Mark B
      Posted January 18, 2015 at 6:54 pm | Permalink

      Would that be the same, Ed Davey that is part of a coalition government, whose leading party leader, the PM, vowed to make it the; “Greenest government EVER !!”

      • Richard1
        Posted January 19, 2015 at 2:02 pm | Permalink

        Yes fair enough but we havent heard such language from Mr Cameron recently.

  7. Dame Rita Webb
    Posted January 18, 2015 at 9:41 am | Permalink

    Dave says he wants bosses to help the lumpen proletariat by passing on the drop in energy costs in the form of higher wages. Well he could do something right now himself by cutting the fuel duty. The only EU country that taxes petrol more highly is Holland, so why do we have to bear it? Its a nasty regressive tax and it has absolutely no effect on climate change. The Chinese government uses a margin of error of around 25 million people in its census. The population of the UK is around twice that. So even if everyone here was driving a Trabant and heating their homes with brown coal, it would make absolutely no difference in comparison to what the populations of China and India are contributing to “greenhouse gas” emissions.

    • fedupsouthener
      Posted January 18, 2015 at 6:10 pm | Permalink

      It’s all about money and nothing else. It’s another way to get money from us where they hope people don’t notice and as you say, it makes no difference to CO2 emissions at all – not that this will have an effect on anything anyway. The whole ‘renewables’ industry is a farce.

  8. Posted January 18, 2015 at 9:41 am | Permalink

    All buyers – including government procurement – should be demanding a major reduction in the price for new purchases as most products have oil inputs (the obvious being transport).

  9. ian wragg
    Posted January 18, 2015 at 10:31 am | Permalink

    Base prices for petrol are about 25p a litre. CMD says to oil producers to cut the price when 75% of a tankful is tax. It’s the government that needs to reduce the tax and give the exploration companies some incentive to explore..
    What now the stupid Davey’s boast of wind and Pv being competitive . Just goes to show the sheer stupidity of building even one more windmill.
    I think the Yanks may give covert subsidies to the shale producers so as to hurt Russia and Iran. Shale is here to stay.

    • Rita Webb
      Posted January 18, 2015 at 8:24 pm | Permalink

      You have no chance of Obama offering a bung to the frackers. Just take a look at all the redundancies that are taking place right now and how the credit worthiness of the companies involved is being destroyed. Obama could not give a toss judging by the number of times he has vetoed the development of the Keystone pipeline.

      • mitchel
        Posted January 19, 2015 at 10:26 am | Permalink

        As they go bust the assets of the US shale companies will be acquired by those larger energy companies with deeper pockets.

  10. bluedog
    Posted January 18, 2015 at 10:33 am | Permalink

    ‘Banks may need some of their new reserves to deal with extraordinary losses on oil financings.’

    An astute post, Dr JR. The collapse of the oil price has yet to play out in the banks reporting to the markets of the trading in the December quarter. The proprietary trading desks of a number of financial intermediaries may be having a very difficult time. Not only will oil have potentially stressed their books, but the sudden capitulation of the Swiss National Bank followed by the 20% surge in the CHF will have caused further misery. Those who saw all this coming and positioned their books accordingly will have made Soros-style profits. But derivatives are a zero-sum game and there will be some hefty loses to report too.

  11. ian wragg
    Posted January 18, 2015 at 10:34 am | Permalink

    I see at this point in time wind is providing 2.7 GW on a 40 GW demand. Cold day, high pressure, little wind, lights to go out under LibLabCon scenario.
    Only 15 weeks to go.

    • Lifelogic
      Posted January 18, 2015 at 12:48 pm | Permalink

      And the true cost of this tiny part of the demand is huge, compared to just using gas coal or even oil. We have have to pay for Cameron/Huhne/Davey’s silly green religion and lack of any understanding of the science/engineering/economics.

      • fedupsouthener
        Posted January 18, 2015 at 6:22 pm | Permalink

        Renewables are a farce.

        Current expenditure on UK wind farms is more than £20 billion. If that
        > money had instead been used to construct 30 gas-fired power stations to
        > replace those using coal, emissions reduction would have been about 37 per
        > cent. Pristine countryside, reliable energy supplies and undamaged wildlife
        > would have been maintained. The present plethora of wind farms has only
        > reduced emissions at best by 7.5 per cent; necessary use of gas-fired
        > back-up for reliable electricity supplies makes it less than 4 per cent in
        > practice.
        >
        > The production of just six solar panels requires at least one tonne of coal
        > to bake the silicon at high temperature. Solar panel production plants
        > generate 500 tonnes of hazardous sludge every year. Their manufacture
        > releases hexa-fluoroethane, nitrogen trifluoride, and sulphur
        > hexa-fluoride, greenhouse gases thousands of times more damaging than
        > carbon dioxide.
        >
        > The life expectancy of solar panels and wind turbines is one half to one
        > quarter that of gas-fired or nuclear power stations. Dams for hydropower
        > (concrete again) are only scheduled to last 50 years. The low density of
        > energy for both wind and sun requires huge areas of land for electricity
        > generation. To replace the recently closed Cockenzie power station (1.2GW)
        > would require turbines covering a minimum of 70 square miles of countryside.
        >
        > Geothermal energy requires fossil fuels/cement for power station
        > construction. Power transmission requires cables made either of steel,
        > copper (mined and processed) or even carbon fibre processed from fossil fuels.
        >
        > The Drax coal-fired power station generates 7 per cent of UK electricity
        > and has been partially converted to burning wood to benefit from government
        > subsidies. A forest area substantially larger than Wales is needed for wood
        > supply. But deforestation abroad to supply the wood threatens replacement
        > of diverse ecosystems and wildlife damage with tree monocultures. When
        > burnt, wood is dirtier than coal in releasing CO2, nitrogen oxides, carbon
        > monoxide, particulates and organic volatiles. Up to 50 years are required
        > to recover the CO2 emissions. Most biofuels produce some surplus energy
        > over energy invested but with poor or negative emissions saving.
        > Displacement of crop-growing land for biofuel forces food price rises.
        >
        > Renewable energy is a myth; none will last longer than the non-renewable
        > sources they all need. Uranium and thorium reserves should last thousands
        > of years. Nuclear fission in small, fast-neutron, modular reactors
        > generates electricity but waste that decays in one to two centuries. A
        > breakthrough in the construction of small containment vessels for
        > deuterium/tritium fusion has been reported. One kg of fusion fuel produces
        > energy equivalent to 10 million kg of fossil fuel. Deuterium is abundant in
        > the oceans. This is the future, not renewables.

    • fedupsouthener
      Posted January 18, 2015 at 6:25 pm | Permalink

      How can anyone justify the £8m that has been paid to Scottish wind farms to turn off?? Scotland is erecting more and more turbines even though the grid cannot take the power at times. How many nurses would this have employed or new homes built, roads improved, etc etc?

      Time for change and the elections is approaching fast. Someone had better start talking sense.

  12. agricola
    Posted January 18, 2015 at 10:42 am | Permalink

    I would have thought that the largest concern that needs to rebalance is Government. Reduced oil revenues should mean lower Government spending. Any compensatory tax increases would have a negative effect on the economy. We are already at tax saturation point, if not beyond it.

    I had thought that the production of shale gas and oil was much cheaper than offshore oil and gas, particularly as of now the industry is going after the harder to get 50% of what we were first presented with in the North Sea. The scale of capital investment should be much lower but all the techniques remain the same and are transferable.

    The effect on the Middle East is no bad thing. Perhaps the West will feel less inclined to involve itself in their mediaeval blood letting. Dependence on oil, or for that matter any other natural recourse is an easy fix for any economy. There are countries that exist on their intellectual wealth, Switzerland, South Korea, and Japan for instance. Maybe the UK should head back in that direction and take up high tech manufacturing on a grand scale. The first step would be to become a very low corporate and income tax base, and then get back to people being much more self reliant and less Government dependant. A divorce from political Europe would be a welcome step.

  13. Posted January 18, 2015 at 10:48 am | Permalink

    I agree with your overall assessment on energy this am . Investing in energy is , however , a long term and not a short term consideration . The ups and downs of prices of energy have been a characteristic of the world’s economy for many long years and will continue ; the assets held by the energy organisations are still there and have value ; holding on to them is part of their plan .

    The Saudis have shown that they can control the oil market and protect their future ; their wealth and reserves will carry them forward for a long time . If they believe they can force up the price of shale gas by their tactics , they are making a grave mistake . Shale gas does have a profitable future and an important value in underpinning the market as another resource . The UK is well placed in this regard with the ultimate consumer as the nett gainer . Equally the USA has everything to gain . In bouyant economies the temporary adjustments will be more than offset by growth in other areas ; these “blips” can be taken on the chin by the energy companies as they rest their reserves at little or no cost .

    • Denis Cooper
      Posted January 18, 2015 at 1:47 pm | Permalink

      Whether shale gas has a profitable future depends on the cost of alternatives, and with the cost of oil halved presumably much of it will no longer be profitable.

    • Mark
      Posted January 18, 2015 at 3:55 pm | Permalink

      The Saudi wealth fund is said to be worth around $750bn. The loss of 50$/bbl of revenue on 8 mb/d of exports is worth around $150bn a year: I doubt whether the Saudis won’t blink long before 5 years is up, if other events don’t intervene anyway. King Abdullah is frail, 90 and in hospital.

      • Denis Cooper
        Posted January 19, 2015 at 11:26 am | Permalink

        That $750bn wealth fund, which may or may not give the Saudis the power to drive competitors out of business and so strengthen their future position as a supplier, will be just one result of all those IOU’s given in exchange for Saudi oil, IOU’s which another commenter claims are of no value or use to recipients and can be written in unlimited quantities year after year without any possibility of that ever creating problems …

  14. oldtimer
    Posted January 18, 2015 at 10:49 am | Permalink

    I agree with your comments here. The big unkown is how long the drop persists. Is it a new equilibrium for several years or will the price rise to a new equilibrium somewhere between the current price and earlier levels that reflects a sustainable price level? Meantime, everyone else unconnected with the oil industry can expect real cost of living benefits – unless and until that is screwed up by some misguided politician.

    Althought the price drop is bad news for many working in the sector we should not forget that when oil shoots up in price it has even more devastating effects of everyone else. The original oil price shocks of the mid 1970s and late 1970s, partly boosted in the UK by the discovery and exploitation of North Sea oil, pushed the value of sterling to relatively high levels. A global debt crisis effectively shut down many export markets which ran out of money. It is estimated that about one quarter of UK manufacturing capacity was wiped out in the aftermath.

  15. Max Dunbar
    Posted January 18, 2015 at 11:22 am | Permalink

    Would it be too much to hope that the drive for ‘renewables’ may be curtailed or will ideology triumph over the markets and common sense in this country?

    • Lifelogic
      Posted January 18, 2015 at 12:50 pm | Permalink

      It need to be curtailed immediately, just stop the subsidies and the largely pointless industry just dies. It should never have been created by the green loons (using our taxes) in the first place.

  16. Kenneth R Moore
    Posted January 18, 2015 at 11:55 am | Permalink

    Apologies for being off topic, but this is too important a matter.

    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/388934/45584_Prevent_duty_guidance-a_consultation_Web_Accessible.pdf

    The ‘Prevent programme’ is a key part of Mrs May’s Counter Terrorism Bill that seems to be thundering through parliament with barely a whimper of protest.

    See paragraph 107 that includes a reference to ‘nursery schools..’ presumably so staff can be on the lookout for potential terrorists in the sandpit. Mr Redwood, has your home Secretary and her advisors gone completely mad ?.

    To my mind it is a profoundly dangerous piece of legislation – it is entirely conceivable that ‘thought crimes’ that infringe politically correct ideology could be drawn in as promoting ‘extremism’ which seems dangerously loosely defined.
    Whatever happened to the Conservative belief that New Labour had attempted to legislate and control too much ?. Not all problems can be fixed with legislation but alas, Mrs May seems to have forgotten and lesson unlearnt.

    Para 89.
    ‘We define fundamental British values as “democracy, the rule of law, individual liberty
    and mutual respect and tolerance for those with different faiths and beliefs
    ”, and we expect institutions to encourage students to respect other people with particular regard to the protected characteristics set out in the Equality Act 2010 (including with that being used for schools).

    Para 89 bizarely equates ‘British values’ with the politically correct Equality Act of 2010.(who outside of Westminster would see it that way) .
    This is an assault on Conservative England … the arrogance of this document is staggering… telling us that our values should be their holier than thou, sanctimonious ‘protected’ PC values. This is an intrusion too far.

    I would be interested to hear our kind host’s view.

    • bluedog
      Posted January 18, 2015 at 9:34 pm | Permalink

      The remedy is simple, Mr Kenneth R More, you merely have to adopt the appropriate ‘protected characteristic’ under Mrs May’s enlightened legislation. Then you can say and do as you please, having acquired an immunity denied to the majority.

  17. CHRISTOPHER HOUSTON
    Posted January 18, 2015 at 12:21 pm | Permalink

    The oil price at $100+ was set to decline. It is said by some to be a cyclical commodity. It was expected over the few months to December 2014 to slowly sink to around $65, to bottom at that price and then slowly increase again in the first and second quarters of 2015 to around $80 then relatively quickly to $95 and perhaps beyond dependent on the consumption of China and India.

    The Labour Party announced its price freeze for energy very cynically in anticipation that when the the run up to the 2015 began in January this year and right through May 2015 there would be little change in domestic bills due to forward buying by energy companies and then they would be elected and TELL the energy companies to freeze prices when the companies could very well have decided to decrease them.

    Labour is advised by Rt Hon Mr Ed Balls and his analysis and predictions are based on common astrological assumptions and at the local political level, palmistry.

    The very rapid decline in the oil price suggests by it’s speed that it was an artificial decline and will bounce back up. Furthermore, I feel the oil price has gone as far down as is geo-politically comfortable for Saudi Arabia. Even its friends are not impressed. She is not in a location where friends are unnecessary. See the 600 mile wall being built on the northern border. Fear.

  18. Denis Cooper
    Posted January 18, 2015 at 12:23 pm | Permalink

    I’ll be interested to see what people say about WHY the oil price has halved.

    I can understand that the governments of some oil-producing countries may not have built up adequate financial reserves of different kinds, and so they may be left with no choice but to insist that companies in the country carry on pumping up and selling as much oil as they can however low the price may go.

    But I would have thought that other countries such as Saudi Arabia would not be under that constraint; surely the government could decide that they were simply not prepared to have their country’s irreplaceable oil reserves sold at such low prices and so they would cut their production, and if the loss of revenue from oil led to cash flow problems they would draw on some of their financial reserves instead, maybe selling off bonds or shares or other liquid assets that they may hold?

    Or is it true that the Saudis are deliberately trying to price other energy producers, and in particular frackers, out of the market, bankrupt them and shut them down, and they are willing to take short term losses for that longer term goal?

    As suggested for example in the Los Angeles Times, here:

    http://www.latimes.com/opinion/topoftheticket/la-na-tt-saudis-price-war-20150115-story.html

    One thing is for sure: thanks to the UK supporting and adopting insane EU policies, the lower the oil price goes the more we will have to fork out in subsidies to the privileged producers of expensive, inefficient and unreliable “green” energy, so whatever benefit we get as consumers will be partially offset by extra costs dumped on us as taxpayers.

  19. ian
    Posted January 18, 2015 at 12:32 pm | Permalink

    Yes and the government on the hook for over 20 billion in shut down costs and clean up costs if the oil companies want to pull out of the north sea. What about the vat on fuel, will be down by one third, oil companies tax like income tax, NI tax, one person on 150,000 pounds a year, over 100,ooo pounds gone in tax, all the fuel they uses gone in tax, ships and so on, oil reveunes, no more rigs being built, the housing market in scotland will take a hit and so on. I feel a bit of enron accounting coming on. Wet & mad a quick fiddle of the books.

  20. Denis Cooper
    Posted January 18, 2015 at 1:35 pm | Permalink

    Off-topic, now some are suggesting that Greece should be treated as if it were a third world country and have its debts “forgiven”:

    http://www.theguardian.com/world/2015/jan/18/should-greece-debt-forgiven-new-idea-europe-syriza

    • Leslie Singleton
      Posted January 18, 2015 at 7:52 pm | Permalink

      Denis–I especially like the idea of a “primary surplus” and I quote “That means if it wasn’t for having to pay the interest on its debts, it would no longer be living beyond its means”. For about a dozen reasons, including the very size of the interest, that isn’t saying very much but reading the papers you’d never guess it. I’ll bet that Marks and Spencer before say Salaries is doing splendidly; or an ordinary house owner before his mortgage interest. Why I spent all those years paying off my debt I have no idea. More fool me.

  21. StevenL
    Posted January 18, 2015 at 1:38 pm | Permalink

    If land prices had halved would you write the same article with the same conclusion?

    Reply No because the consequences would be different!

  22. Posted January 18, 2015 at 1:44 pm | Permalink

    It is interesting to ask if it is still possible to achieve low levels of unemployment in an economy under the conditions that all energy and raw material costs are extremely cheap on the one hand or extremely expensive on the other.

    I believe it is. If extremely cheap then the available natural resources are greater so our living standards should be higher. It wouldn’t make sense, just from an economic point of view, to concern ourselves with low energy lighting or even developing cars and planes with good fuel efficiency for example. But there might be other considerations. 2014 was the warmest year and CO2 atmospheric concentrations were both the highest on historical record.

    If extremely expensive, than our overall living standards will be lower. But, it would be necessary to make the maximum use of the energy and raw materials that we had. So in cities, rickshaws and horse drawn trams might become economically competitive once again. We would be less of a ‘throw away’ society. We’d have to repair and refurbish items after a few years of use instead of replacing them with new ones. The price mechanism would dictate that. So many of the old trades like shoe repair, bicycle repair etc would expand once again creating many new jobs, which might not be such high paying jobs as we’ve previously been used to, but they would still be jobs.

    Either way the economy would adapt. So, I would argue that the price of energy, whether it be high or low, shouldn’t be used as an excuse for poor economic performance.

    • forthurst
      Posted January 18, 2015 at 9:14 pm | Permalink

      “2014 was the warmest year and CO2 atmospheric concentrations were both the highest on historical record.”

      The latter has no connection to the former and NASA have now backpedalled by claiming that their degree of certainty is only at 38% i.e. they mispoke.

  23. A different Simon
    Posted January 18, 2015 at 1:57 pm | Permalink

    If exploration companies attempt to defer exploration expenditure they will risk forfeiting their licenses .

    There are agreed work programs and expenditure obligations for each year until expiry / renewal which they have to fulfill .

    The banks which offered hedging contracts at typically $80-$95/bbl might have contemplated that prices could drop to $75 thus leaving them with a $5-20 exposure but not to $45 with a $35-50 exposure .

    (company ref left out ed)

    The problem is going to come after oil prices have recovered for oil companies which want to finance field development . The loans have covenants requiring a proportion of production to be hedged to ensure the lender gets their money back .

    If companies can’t get the hedging , they won’t get the finance .

    Even at $100/bbl , many household name oil companies which people mistakenly believe are money trees were not cash generative .
    Neil Woodford amongst others recognised that companies maintained their dividend by cutting back on exploration and R&D – and that is when oil was $100 .

    They are surviving on legacy barrels and not adequately replacing them .

    At the moment the price has undershot because speculators reckon they will be able to buy it cheaper in the near future and are holding off . Soon as that sentiment reverses oil should rebound .

  24. Posted January 18, 2015 at 2:11 pm | Permalink

    If, as expected the oil prices stays low compared to the last few years, the effect on consumer prices across the board is also going to be immense. Everything from food where the average EROEI is 10:1 against, to most manufacturing processes and of course commercial and personal transportation.

    Personally, I don’t worry about disinflation where it has dropped below the 2% target, after all we had to put up with about 2% ‘temporary’ inflation for several years during the 2008 recession / depression, while wages were falling and now it will be good to see an upside with real wages increasing. Even if we have a deflationary period I personally can’t see consumer spending falling where people are waiting for tomorrow’s price to be cheaper, where we have had this effect from globalization since the late 1980’s, especially from the increasing consumption of cheap goods from Asia. It has happened in Japan, but their economy is very different to ours and they do have very different challenges, especially from demographics.

    The bad news for EU countries is that where Brussels in heavily pushing inefficient expensive renewables, to cut plant food emissions, this will make Europe even more uncompetitive compared to the USA and Asia.

    The vast size of the US has always made energy prices an important component in economic performance, so expect continued robust growth, where many high energy industries have already left the EU to take advantage of their much lower energy prices and many more will do so. Expensive energy will continue to add to the stagnation pressure that most mainland economies are suffering and will continue to increase unemployment and the dog chasing its tail austerity measures, where overspending Governments try to reach their 3% deficit targets.

    The UK will not do as badly as mainland Europe, but with high energy cost policies, growth will not be as high and standards of living will not rise as fast as those in the USA.

    The $60 to $80 price per barrel production cost quoted for US fracking, includes all of the exploration and pre production development costs, much of which will have been amortised during the high price times. Strip these out and the daily production cost is around $40 a barrel and steadily falling as improved, cheaper fracking technologies, continue to be introduced. These improved production methods are also helping to reduce production fall off compared to many quoted figures, due to more oil and gas being extracted, more efficiently. So, yes below $60 prices will eventually lead to exploration and US fracking production slowing, but this will take much longer than most people are expecting. Currently, production is still increasing.

  25. A different Simon
    Posted January 18, 2015 at 2:31 pm | Permalink

    While commodity price risk is one of the risks inherent in exploration and production , political risk is another .

    The UK has a reputation for frequently changing taxation and fiscal terms .

    For oil and gas projects the UK is considered to have very high political risk associated with it . This is not helped by the establishment being ideologically opposed to fossil fuels .

    The fundamentals have changed but the Govt is still sitting on the fence .

    The Govt needs to either reaffirm it’s commitment to the climate change act or scrap it .

  26. ian
    Posted January 18, 2015 at 2:57 pm | Permalink

    Good news for russia because they be forced to make the changes to there economy which they have been putting off because revenues from oil and will come out stronger than they went in.

  27. ian
    Posted January 18, 2015 at 3:06 pm | Permalink

    That”s hope that your plan for the public to go on a spending debt binge works out.

  28. forthurst
    Posted January 18, 2015 at 3:11 pm | Permalink

    “The more I think about the halving of the oil price, the more significant it seems.”

    e.g. assuming that the oil price was not on life support and has not now been deprecated, all through market rigging, a widespread activity, including in those markets that underpin the dollar, namely silver and gold, the latter persisting presumably ’till the last bullion bar is sitting in a vault in Moscow or Beijing or adorning an Indian female form, then what is it telling us about the state of the global economy? It can only mean one thing, recession, since presumably there has not been such a great leap forward in the provision of continuous energy from windpower, such as by making the Globe spin faster.

    Despite the green shoots everywhere espied by over-optimistic Chancellors, the world economy, in reality, is being hamstrung by two self-inflicted causes, the Eurozone death spiral and the maniacal neocon war on Russia. Russia, itself will probably benefit from a lower rouble in the medium term as the high rouble has prevented the development of competitive non-hydrocarbon based industries, still backward from eighty years of Bolshevik tyranny etc ed

    • stred
      Posted January 19, 2015 at 1:47 pm | Permalink

      Some are suggesting that the oil price fall may be rigged by the EU/US in order to deprive Russia of resources and weaken its support for Eastern Ukraine. The Greens in the EU may also be hoping to stop fracking in Europe. However, the Russians are also waging a campaign against fracking. The fall seems more likely to be caused by a combination of factors.

      Over the weekend the shelling of Donetsk and fighting for the airport ( while wrecking it) has resumed, with Poroshenko ignoring a letter from Putin suggesting a reduction of forces.. The Russians are blaming the EU/US for encouraging him. If they have not restrained Poroshenko from a full scale attack in the coldest part of the winter, this would seem unwise, bearing in mind that the gas pipelines run through the area and supplies to Europe could be cut off if things go badly for the rebels. Perhaps the EU believes that Russia has run short of cash and cannot afford to abandon 8 weeks of maximum receipts. If so, they should look again at the figures.

      Meanwhile another needless war is causing a disaster for thousands, because of a desire of a few politicians to push their influence in areas where it is not wanted.

  29. Terry
    Posted January 18, 2015 at 4:23 pm | Permalink

    There is another plus side to the falling Oil Price – it is placing a muffler on Mr Salmond. I got very tired of his blustering, especially when breaking his promise not to seek independence again for a generation.

    The SNP failed in 28 out 32 constituencies yet he still believes the voters got the wrong answer. He should relocate to Brussels – the experts in overturning a vote for democracy.

  30. Terry
    Posted January 18, 2015 at 5:06 pm | Permalink

    The falling price has been deliberately manipulated by OPEC and probably at the behest of Saudi Arabia and for the sole reason to smash/bankrupt Shale Oil projects around the world. There are just defending their near-monopoly.
    It is claimed that the Saudis can produced oil for < $20 per barrel. Venezuela not a lot more. However to balance their respective budgets they require their Oil to be at $93 and $121 per barrel (WSJ). Brent Crude alone, costs $90 to produce so those fields are going to be in real trouble.
    Now the Saudis have vast reserves of cash but not so Venezuela, so I do wonder whether, to keep others on-side, that the Saudis are subsidising some of the other members of OPEC. Should I ask the CIA?
    If true, it is stupid, maybe malicious, behaviour when all they have to do is buy into Shale Oil in Europe and Canada and the RotW. I do not believe the Americans will allow them into that vital industry though.
    Neither should we and the incumbent Government should ensure that once production is under-way here that they open up an aligned Sovereign Wealth Fund to support future State Pensions. Much like Norway today.

    Now, how do our IR numbers stack up within the UK, John? Falling Oil price also means falling tax revenue. Does this mean more Government borrowing? And a subsequent hand out from Brussels?

    • A different Simon
      Posted January 18, 2015 at 5:57 pm | Permalink

      Big-Oil and plenty of powerful people in the U.S. want to preserve the status-quo which the U.S. shale upstarts have threatened so Opec’s refusal to cut suits them .

      I reckon that if Obama could have banned U.S. shale gas and tight oil he would have done so a long time ago .

      Obama is on record as wanting $6 gasoline and a bunch of rednecks and roustabouts have helped send prices to half that .

      Who would have thought that small independents could ramp production up by 5 million barrels a day in only 8 years from these low permeability reservoirs .

      You would have to think that part of the plan is to try of the Saudi’s and Big Oil is to distress the sector and buy those companies which do have assets which work at lower prices .

      Whilst it’s great to be able to import their expertise for peanuts , what the UK really needs to import from America is the ingenuity and entrepreneurialism that made it possible .

  31. John E
    Posted January 18, 2015 at 5:16 pm | Permalink

    What we are seeing is the resumption of a free market following the collapse of the OPEC cartel.
    Oil production will still be required at a level to match consumption. The market will settle at around the highest cost production that is required to meet demand – probably $50 or so per barrel. Lower cost producers will continue to reap vast profits.
    I am an optimist in that I think the crash has been caused more by excess production than by a crash in global demand. I also suspect some market participants (speculators) may have exited the arena before they incur more large fines.

    The trouble with a free market in a scarce finite resource is the “tragedy of the commons”. Peak Oil is deferred by the shale producers but will still happen eventually.

    Irrespective of our beliefs on global warming we should continue to develop alternatives. We need oil as the feedstock for our plastics. One day our descendants will curse us for burning it.

  32. Vanessa
    Posted January 18, 2015 at 11:10 pm | Permalink

    This price for oil makes a mockery of the governments contracts with their new energy deals. Was it nuclear or gas, I can remember which, but the deal to build new power plants had the government agree to a price which must have mirrored the highly inflated energy prices. Now they have fallen, will it go back to the French company (?) and say that the price is now too high and they need to renegotiate the price they can charge ?
    Ho ho ho !!!

  33. Posted January 19, 2015 at 5:44 pm | Permalink

    Saudi Arabia has abandoned the OPEC idea. They have no love lost for the US, its fracking industry, Russia, Africa and Shia Moslem States. In future, most of the world’s oil needs will be supplied by nations whose extraction cots are low.

    • stred
      Posted January 19, 2015 at 9:46 pm | Permalink

      Lindsay. This is the most sensible explanation for the oil price fall so far.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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