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If they do, renewable energy will look even worse

My Times column was on the likely effect of weaker
oil and gas prices on competitiveness:

The Chancellor is to knock £50 off the average
energy bill by replacing some green levies with general taxation
and extending the timescale for rolling out others. On the face of
it, the possibility that global energy prices may start to fall
over the next few years might seem like good political news for
him, and some of the chicken entrails do seem to be pointing in
that direction. There is, however, a political danger to George
Osborne in such trends .

For Government strategists reeling from the twin blows of Ed
Miliband’s economically illiterate but politically astute promise
of an energy bill freeze and the energy companies’ price hikes, the
prospect of lower wholesale energy prices might seem heaven sent.
But in many ways it only exacerbates their problems, for the
Government is right now fixing the prices we will have to pay for
nuclear, wind and biomass power for decades to come. And it is
fixing those prices at quite a high level.

The more that oil, gas and coal prices drop, the worse these
deals look and the more they threaten our economic competitiveness.
The Liberal Democrats have not allowed the Chancellor to cut
subsidies for the renewable energy industry, the most regressive
redistribution of wealth since the Sheriff of Nottingham was in his

They argue that what has driven energy bills up threefold in ten
years is mainly an increase in the wholesale price of energy,
rather than any great lurch towards subsidising renewables. True,
but most of the lurch is yet to come and as wind power capacity
quadruples by 2020, it will add £400 to average bills — not to
mention driving up the price of energy to industry, which will pass
it on to consumers.

“There is not a low-cost energy future out there,” said Ed Miliband when Secretary of State for
Energy and Climate Change in 2009, at the time an enthusiast for
discouraging energy use by price rises. It even became fashionable
to argue, when Chris Huhne filled that post, that
higher prices would cut bills (yes, you read that right) by
encouraging people to use less power.

Anyhow, the forces that have driven energy prices up in recent
years appear to be fading. Consider some of the reasons that oil
and gas prices rose in 2011, the year energy companies pushed up
prices even more than this year. Japan suffered a terrible tsunami,
shut down its nuclear industry and began scouring the world for gas
imports to keep its lights on. At about the same time Libya was
plunged into civil war, cutting off a key supplier of gas. Add in
simmering tension over Iran, Germany’s sudden decision to turn its
back on nuclear power, the legacy of a couple of cold winters and
the lingering depressive effect on oil and gas exploration of low
energy prices from much of the previous decade, and it is little
surprise that oil and gas producers pushed up prices.

Contrast that with today. Several years of high prices have
driven a surge of new exploration. Deep offshore technology is
advancing rapidly and huge gas fields have been found in the
Mediterranean and in the Indian and Atlantic oceans. In the United
States, the shale revolution has glutted both gas and oil markets,
displacing imports. Iran is coming in from the cold, Libya is back
on stream and Australia is preparing to export huge volumes of gas.
Should the rest of the world start producing shale gas — China,
Argentina, Poland and others are on the brink, even Britain might
one day deign to join them — that would further add to supply.

A decade is a long time in energy policy. Ten years ago, no less
an oracle than Alan Greenspan told Congress: “Today’s tight natural
gas markets have been a long time in coming, and distant futures
prices suggest that we are not apt to return to earlier periods of
relative abundance and low prices anytime soon.” Abundance and low
prices are exactly what America now has: so much so that it is
using gas instead of coal to provide base-load electricity,
investing heavily in manufacturing and chemical industry, and
shifting some of its road transport from oil to gas. By 2020, shale
gas will have boosted the American economy by £500 billion, 3 per
cent of GDP and 1.7 million jobs, according to McKinsey Global Institute.

Meanwhile, the argument that the running out of fossil fuels is
what has been driving up prices has been proven once again, for the
third time in my lifetime, to be bunk. America, the most explored
and depleted oil and gas field in the world, is now increasing its
oil and gas production at such a rate of knots that it is heading
towards self-sufficiency. If an oil field as gigantic as the Eagle
Ford can be found (through technological innovation) in Texas,
think how much awaits explorers in the rest of the world. Even five
years ago, gas was thought likely to be the first of the fossil
fuels to run out. Nobody thinks that now.

At least nobody outside Whitehall. As Professor Dieter Helm told a House of Lords committee last month: “I
think one should be very sceptical about this Government and the
last Government embarking on policies that require them to assume
that the oil and gas prices are going to go up and then pursuing
those policies and not being willing to contemplate the consequence
of that not being the case.” According to Peter Atherton of Liberum
Capital, the recent “strike price” deal with EDF to build a nuclear
power station at Hinckley Point in Somerset will only look good
value to consumers if gas prices more than double by 2023.

Suppose, instead, world energy prices come down, even as the
cost of subsidising renewables and nuclear starts to bite. We will
have rising energy bills while the rest of the world has falling
ones. That is a recipe for job destruction.

One of my favourite charts – I know, I should get out more – comes from Professor Robert Allen of the
University of Oxford. It shows the cost of energy, as measured in
grammes of silver per million BTUs, in various world cities in the
early 1700s. Newcastle stands out like a sore thumb, with energy
costs much lower than London and Amsterdam, and far lower than
Paris and Beijing. The average Chinese paid roughly 20 times more
for heat than the average Geordie. This meant that turning heat
into work (via steam engines) throughout the north of England was
profitable. In China, by contrast, it made more sense to employ
lots of people, on low wages . The result was an industrial
revolution in Britain with innovation and rising living standards
and an “industrious” revolution in China (and Japan) with falling
living standards.



Affordable energy is the indispensable lifeblood of economic
growth. Back in 2011, David Cameron was warned by an adviser that electricity, gas
and petrol prices were of much greater concern to voters than any
other issue, including the NHS, unemployment, public sector cuts
and crime. If subsidies for windmills prevent us from passing on
any future falls in gas and oil prices, and jobs flee to lower-cost
countries, the voters will not be forgiving.

By Matt Ridley | Tagged:  rational-optimist  the-times