"George Trefgarne has contributed a rather trite piece to the Telegraph, one hopes against its better judgement. Published on 27th August, the item is headlined, “A new age of cheap energy approaches”. As it says on the tin, his thesis is that energy prices are coming down, sometimes to "record lows", and won’t return to last year’s levels any day soon. Gas and electricity bills are coming down, diesel is the same price as petrol, and “… the world is practically choking on gas, and is potentially awash with oil.” Can this be the same George Trefgarne who was once economics editor of the Telegraph?
Mr Trefgarne’s explanations are, firstly “a surplus” of new gas supplies from North America. This he ascribes to free markets developing the technology to produce so-called “tight” gas, which isn’t held in conventional reservoirs but in pores in almost impermeable rock. And, to the sound of his own cheering, he announces that this technology could even be used outside the USA. Secondly, he has discovered that there is idle oil capacity, due to OPEC production cuts and new projects coming on stream. This he believes will all lead to energy bills being cut by several hundred pounds a year, providing a global stimulus of trillions of dollars. That’s right, trillions.
Right. First, the technology and geology. Tight gas has long been known about, and wasn’t exploited much in the past because it takes a lot more drilling, and thus costs more, than conventional gas. Let’s add, before Mr Trefgarne announces it as news, that there are even more unconventional but well-known sources of gas, such as sea-floor clathrates, which are an ice-like solid composed of gas and water, stable only at high pressure. And it’s perfectly true that US gas reserves have now been raised by the development of tight gas, and US gas prices have dropped sharply. However, that fact doesn't support the romantic vision that Mr Trefgarne has assembled.
And now, the facts. The wholesale gas price has certainly dropped sharply in the UK for some months, but not to a record, only to a three-year low - and three years ago we couldn’t believe how expensive it was. The average UK diesel price is actually still slightly higher than ordinary unleaded, but more importantly, both are still over £1/litre, which is not exactly cheap.
The reason for falling gas prices is more complicated than Mr Trefgarne’s supply-side analysis. Tight gas resources have indeed eased the US market, but so has a rapid growth in supplies of LNG (liquefied natural gas), which can be shipped globally rather than piped. But consumption has dropped during the recession, and I rather think that’s the bigger price lever.
Turning to oil, OPEC has indeed reined in production to maintain the price – as, in Mr Trefgarne’s adored free market, I guess they are entitled to do. But if they don’t, they may be unable to finance the next phases of raising OPEC production, which I would have thought was rather important. As for Mr Trefgarne’s “new projects”, he has carefully avoided noting how many of these have been delayed or completely mothballed, partly for lack of finance and partly because of the falling oil price due to the recession. There may be trouble ahead as a consequence.
Lower fuel prices do of course lead to lower energy bills all round – at least, lower than they have been for a couple of years, although anyone writing in the Telegraph must be old enough to remember much, much lower bills than that. But when Mr Trefgarne then equates several hundred pounds off energy bills with providing a global stimulus of “trillions” of dollars, I’m just speechless. Even if we all saved £200 a year on energy bills, and even if we all went out and spent it rather than saved it or paid down debt, how many of us would have to do that to raise even one trillion dollars of consumer stimulus in one year? Who can tell the class? George? What’s that? Over three billion of us? Oh George – do you really think there are 3 billion people in the world who could possibly save and spend as much as that, due solely to falling energy prices?
Mr Trefgarne finally throws in some gratuitous side-swipes at “panic about climate change”, the forthcoming climate “Copenhagen shindig” and Cameron’s commitment to reduce carbon emissions, should he be elected. I don’t know why he does this, as it isn’t relevant to his argument. I suppose he's entitled to ignore the evidence if he finds it inconvenient.
In brief, then: there is no new cheap energy. There is quite a lot of tight gas, but it’s more expensive. Energy prices are coming down somewhat, because they went up dramatically and consumption then fell, but wiser heads see that this can only be temporary. When consumption starts to recover, so will prices. All this is following, and will follow, normal market forces. And, George, peak oil will come along and bite you, and although you will still be able to afford to fill your car, it will still bite you, from the food you eat to the electricity you waste composing such pieces on your PC. And I expect you’ll still blame someone else.
Dr. Richard Miller is an Independent Consultant, and former geochemist for the BP Exploration Department