Bone-chilling: a dual winter threat
From London to Lyons, this week has given many people their first sharp taste of winter. Adding to the chill is the prospect of bigger bills as heat and power prices soar to vertiginous levels. In all the main economic regions of the globe, energy systems are heavily stretched in the attempt to meet ever-increasing demand.
Could an unusually cold winter be the trigger that tests one of those systems to the limit - and perhaps beyond? And does the absence of slack in the system mean that even a relatively warm winter could cause serious disruption to supplies?
Record-breaking winter temperatures are often predicted but this time there is some reason to believe they may materialise. The UK's Meteorological Office has declared a two-thirds chance of a colder than average winter, something not seen in a decade (see below).
That would come at an especially sensitive time in the country's energy history. Britain is shifting from being a big producer of natural gas to a substantial importer of such products - and traders fear it could get caught short in the transition. North Sea gas production is declining faster than expected but the pipelines and LNG terminals needed to import gas from abroad are not yet ready. The result is that Britain's gas supply this winter and next is likely to be among the tightest in living memory.
This is about the UK, but the USA are in the exact same situation, with the full North American supply (including Canada's production, most of which already goes to satisfy US demand) now stretched and unable to follow demand:
LNG supply is due ti fill the gap, but it is only slowly increasing for now due to lack of terminals, and those that are now under construction will come on line only in 2008-09 and may not be enough. In the meantime, the possibility of shortages is real.
In the US, natural gas production was hard hit by hurricanes Katrina and Rita and, even now, a third of the Gulf of Mexico's gas production remains out of action. The storms also disabled many refineries along the Gulf coast, hitting the production of heating oil.
The US has so far enjoyed a mild autumn and the National Oceanic and Atmospheric Administration is forecasting a warmer than average winter. But worries persist. Weather Derivatives, a Missouri-based forecaster, on Wednesday predicted that home heating demand in the north-east states would be higher than average in the remainder of the month, pushing up oil prices.
The thing is that, by focusing relentlessly on short term profitability, we have slowly eroded the spare capacity of the system, and are becoming vulnerable to unexpected - but no so rarer - event.
The events of last winter may prove instructive. The winter as a whole was warmer than average but a late cold snap caused serious disruption across the region. Electricity demand surged to an all-time high on February 28, forcing EDF, the then state-owned utility, to impose blackouts on Corsica and cut off some industrial consumers.
France, normally a big electricity exporter, had to import power from other European countries, many of which had their own problems. In Italy, gas stocks were all but emptied. In Britain, gas prices also doubled as supplies ran low. "The early spring cold snap we had in Europe this year nearly brought the continental European gas and electricity system to its knees," says Bob Skinner, director of the Oxford Institute for Energy Studies. "Nobody wants to talk about it."
And that's just a likely risk. You also have certain consequences of today's energy crisis:
Even if supplies remain adequate, there is another level of vulnerability: the effect of higher energy prices on the economy. Global demand has proved surprisingly resilient so far to increases in energy prices. Despite a sharp rise in US petrol prices, consumer spending has been relatively robust. But an increase in home fuel bills could hurt more.
Motorists are able to limit their petrol use by driving less or switching to more fuel-efficient vehicles. Without making large investments, however, most homeowners would not be able significantly to cut their use of domestic fuel. "A brutally cold winter would be a significant threat to the consumer, in my opinion, because it would promote a surge in natural gas prices in a market still limping from the double whammy to supply of Katrina and Rita," says Richard Berner, an economist at Morgan Stanley. He estimates that, even if prices were to remain at current levels, a very cold winter would force US consumers to spend up to $60bn more to heat their homes.
That's 0.6% of GDP, or 1% of total consumption over the year, in case you're wondering. And that does not take into account the effect on industry:
At least as alarming is the effect of soaring fuel bills on national businesses. EEF, the UK manufacturers' organisation, yesterday accused the government of being "in denial" over the impact of high energy prices on companies and risks to the security of winter supplies. Already, British chemical manufacturers such as Ineos Chlor and Terra Nitrogen have been forced to leave plants idle in recent weeks as gas prices soared. Gas-fired power stations, which provide around a third of Britain's electricity, have also cut back.
The chemical industry can cut back its natural gas use, but that means less activity, and fewer jobs. And the general trend is to build new plants in countries that have access to cheap gas (i.e. producers like Iran, Qatar or Saudia Arabia). Once production has moved over there, it never comes back.
The power industry is also apparently busy switching some gas plants to coal use where it can (not everywhere). But coal prices have also doubled in recent times, so the impact on prices is just to avoid the most recent increases, but not the general trend. And coal is not good for pollution nor global warming.
The message I am not trying to convey is not necessarily one of doom and panic, but that we must get used to energy beign more expensive. If energy was properly priced, we would use it more wisely. We'd pay to have good security of supply (by paying for reliable sources, not by paying for an oversized military); we'd pay to avoid pollution (instead of dealing with the chronic illnesses it causes via the health system); we'd pay to have enough spare capacity (instead of making the poorest go cold if winter is too harsh and prices go up even more to get people to stop consuming - becuase that's waht the "market" will provide).
Cheap energy is not a right, and it is not even a reality today, because you pay for your "cheap" energy today in other ways (taxes, healthcare, etc). Let's make the price of energy realistic, and then help those that really need help to get access to basic energy - and only them.
Let's stop worrying about energy supply, and worry instead about energy demand.