The situation in the UK

As Stuart and Prof G have pointed out, the situation in the UK seems to be growing somewhat worse.  Unfortunately the industrial solution which is to call for a moratorium on further price increases, is unlikely to be a realistic development.  The Guardian article notes:
The Association of United Kingdom Oil Independents has told the government that its members had never experienced such protracted and widespread problems. The Russian gas stand-off with Ukraine and other factors leading to soaring prices have encouraged power stations and other gas users to switch to oil.

Meanwhile, the Buncefield oil depot fire, the run on oil and other fuels due to cold weather, and a faster than expected rundown of North Sea supplies have caused chaos across the energy sector.

 It is a measure of the invisibility of the topic that I have had conversations with several folk at a relatively senior level here this week, talking about the energy situation, and almost none of them are aware of the problems that arose over Russian gas delivery to Western Europe, or have any inkling of this developing story.
The article concludes with
Statistics released by the Department of Trade and Industry yesterday underlined the fast rundown of local energy supplies, with imports of gas up by 80% in the third quarter, compared with the same period in 2004.

Meanwhile, the fragility of the oil and gas supply infrastructure was highlighted by a problem reducing output from Shell's Pernis plant in Rotterdam, Europe's largest refinery.

 While it is clear from these type of reports that there is growing problem, it is not yet very visible on this side of the Atlantic. Thus, when seeking to increase awareness of the need for research to look for answers, it is not that easy to be able to generate a sense of urgency in the need to find an alternative approach.  

And the underlying story perhaps to the UK situation is that complacency generated by those who said  "there is always the back-up alternative" which in this case was to switch from gas to oil, had never checked to see the reliability of the back-up.  And now that there is the move to the alternative, it is becoming evident that plan B is not working.  And we may soon find out that there was no plan C.

On the other hand, the Russian gas flow was relatively quickly restored, and it may be that those who switched out of gas might have done so prematurely, without complete evidence that plan A had failed.  As the article notes, the situation is somewhat chaotic at present, but those of us who are following the story may also note that the article also suggests that the topic is becoming sexy!  Ah!

I'm not sure I understand. Is there "chaos" in the energy sector in the UK? I thought the Gazprom situation was resolved? What exactly is the price per bcf of gas in the UK currently? Oil? So what exactly is the problem?

I don't mean to seem as if the sky isn't falling, but do we really need to get all wound up about stories that basically happen everyday - somewhere?

For instance, gas is below $10 in the States. Why isn't anybody talking about that? It was $15, 2 weeks ago. Economides was predicting $20 gas by Christmas. Simmons was predicting $200+ oil this winter.

The UK, as you well know, is an island(s). Islands have problems the rest of the world doesn't.In this case it is the "island factor" that is exacerbating any energy problems. On the island I grew up on they pay close attention to water usage (believe it or not) - why? because they don't want to have to build another desalinization(sp?) plant.

Anybody see the Boston Globe article on Nantucket having to run a second undersea electricity cable from Cape Cod to meet the ridiculous new amount of demand coming from all the air-conditioning for its McMansions? Everybody was paying a $5-10 surcharge on their bills every month to pay for the first cable. Now what? These are the same people who don't want a line of windmills blocking their pristine view of the ocean. Or was that Martha's Vineyard?

The UK is just a larger version of this problem. But if any society can handle it, it is the British. Fear not.


For instance, gas is below $10 in the States. Why isn't anybody talking about that? It was $15, 2 weeks ago.

Are you trying to make people feel better by saying that in 2 weeks the price of gas swung 33% and that it currently resides 500% above the price the oil companies were promising just a couple years ago? What happens to an economy with that kind of energy volatility?

Yes, society can handle it, but not until society realize it has a problem, and if you think the people in the United States understand we have problem, your wrong. Remember we all realized 30 years ago that the supply of fossils fuels on this planet was finite and all we've done in that time is burn more.

And yes the speculators and the arbitragers love volatility.

I missed where you were dialing in to say how non-volatile gas prices have been for the last 10 years. 3 months of semi-high prices and it's the end of the world? Please. You still can't tell me what the price of gas is in London.

I checked, but the Financial Times wants $300 for a subscription so I can read the article titled "Gas markets calm down." Maybe you have a subscription.

When I get around to it I'll post a chart I've got doing a crude-to-NG BTU comparison. I really wouldn't start even thinking about gas until is moves past 20. In fact, we want it past 20. That will give more incentive to the industry to promote it. We are going to need gas as a substitute for oil. We need to start building that infrastructure now. Low prices, no investment. We may need to see oil go above 100 in order to push up gas accordingly. WE STILL FLARE RIDICULOUS AMOUNTS OF GAS for no other reason than there is no infrastructure there to contain it.

Come on, we all know that the UK has a problem with her domestic Oil and Natural Gas production. In the second half of 2005, there has been warnings about the UK not having enough Natural Gas this winter, with potential shut-off of factories in case of severe cold temperatures. Well... the severe colds still have to come, but in the mean time Oil and Natural Gas production in the UK are now a staggering 13% down!!!
I missed where you were dialing in to say how non-volatile gas prices have been for the last 10 years. 3 months of semi-high prices and it's the end of the world?

Hmm gas prices rising 500% in the last several years and that's not volatile? You might ask Calpine about that. Gas past 20 will allow the industry to promote it, as opposed the building of over 90% of new US electricity generation of the past ten years being natural gas fired and much of that capacity idle, it is in desperate need of promotion.

The US economy is built on cheap fossil fuels, the question is how that economy changes with more expensive fossil fuels and whether you can do it without a crisis. With a world economy growing at 2005 speed, natural gas will never be 2.50 as the oil companies promoted for the last ten years. All that infrastructure and even more the ability to "secure" it, say for example like we're doing in Iraq, is going to be expensive and that money is going to come from somewhere. The whole world wants it, not just Europe and the US.

I'm all for expensive fossil fuels, its necessary, but transitioning to new sources isn't going to be painless.

Commodities in the UK

Gas doesn't seem to be traded in bourse (or at least I can't find it). The Guardian as a nice article on the subject.

Two things:

.Gas markets in UK and North America are trading supplies from different places, so no big relation between them.

.Oil markets are more connected, since you can easely transport liquids from one side of the Atlantic to the other.

It just happends that gas problems in UK and the US are occurring simultaneously. The high volatile prices in the NYMEX are the consequence of a large gap between demand and supply.

Gas is traded on the London International Commodities Exchange, what was until recently the International Petroleum Exchange

A daily average gas price index for front month futures settlements can be obtained for free at

Continuous spot prices have to be paid for.

As you can see fron the index the price rose from GBP 2.788/Million BTU ($5.04)on June 29 2005 to peak at GBP 10.843/Million BTU ($18.76)on December 3 2005 and has now fallen back to GBP 8.292/Million ($14.59)

Using 1,027,000 BTUs per 1000 cf, we get $14.98/1000 cf basically the same as where it was in the US two weeks ago. On Dec 3rd it looks like it hit about $19.50. When you convert these BTU's to oil equivalent you're still looking at only about $90. Well within reason.

But don't quote me on those numbers. Isaiah will be all over my case.

This is a graph with the spot market gas prices over the last couple of days in the UK. The APX group is Europe's premier provider of power and gas exchanges, operating markets in the Netherlands, the United Kingdom and Belgium. href="" name="APX group"

Spot price UK gas market

Simmons was predicting $200+ oil this winter.
You need to back this up with a credible link.

To my knowledge Simmons once said that Oil could reach as high as $100/bbl this winter. Suddenly this was interpreted as Simmons has definitively stated that oil would be at least $100/bbl this winter. And now you're cranking it up to $200.

Thank you. I find it annoying that people keep misrepresenting Simmons and then use their misrepresentation to discredit him.
That trend (Simmons being misrepresented) bugs the heck out of me, too, but I think Simmons is partly to blame.  He should know that if he says, "depending on a lot of other things, oil could possibly hit $200 to $250 in a few years," his words will very quickly be morphed by the media echo chamber into "Simmons predicts $250 oil is imminent."

That really hurts the whole peak oil awareness effort, as it makes it very easy for the POD (peak oil denier) People to color us as a bunch of catastrophist loons.

I am in no way attempting to misrepresent Simmons or discredit him. I only passed on what I recalled reading somewhere.

This post is not aimed at the author above I just thought it would be a good place to insert it.

louGrinzo's last comment about others coloring us as a bunch of catastrophist loons makes a lot of sense to me.
This is in fact the reason I mentioned the $200 in the first place. Pumping up doomsday scenarios to draw attention to the cause ultimately hurts the credibility of the cause.

For the last three years I have expected and predicted higher oil prices in line with what has actually happened, and I continue to feel that will be the direction of the trend. But I felt there were realistic limits to this trend in the short term. That's why the quote struck me as odd.

So here it it. It was posted on Land of Black Gold in late October. The original Reuters link has been removed, at least I couldn't get it to connect. some of the material appears to be written by the author of the blog. You can visit personally if you like.


Reuters: Oil guru says crude could hit $190 this winter.

The title should really point out that he talks about natural gas or oil.


Consumers should brace for crude oil and natural gas prices possibly doubling or tripling this winter, Matthew Simmons, a best-selling author and oil-supply bear, said on Wednesday.

"Prices are really cheap today and they need to go a lot higher, and they probably will go a lot higher," Simmons said in Ottawa.

"I am very concerned, given the destructive damage done by (Hurricanes) Katrina and Rita, that the United States must be closer to starting to see significant product shortages than we've seen since 1979."

Too much got destroyed and too little has been brought back on stream, the Houston-based analyst said.

He also said that cold weather this winter could bring a very high risk of natural gas curtailment in the United States.

"Either one of those events (oil product shortage or natural gas shortage) could send prices two to three times higher than they are today," he said after a speech in Ottawa.

That could translate into natural gas prices of $40 per million British thermal units from more than $13 now, he said. Doubling or tripling crude would put it in the range of $125 to $190 per barrel.

"Everyone keeps thinking there is a (price) ceiling...There is no ceiling," said Simmons, who wrote in his book "Twilight in the Desert" that Saudi oil output is at or near its peak.

He said he has seen little sign that higher prices so far have done much to reduce consumption.

Simmons said supplies of heating fuel oil were in okay shape, but could drain fast if the weather turned cold. Diesel is tight and shortages of jet fuel had caused some planes to be diverted from some airports.

"It's going to be painful for people to get used to actually paying real money for a really valuable resource," he said.

** end of citation

Yes, it wasn't $200+, it was actually $190. No, he didn't "predict" it would go there, just suggested it could. But, that is how I remembered it. I apologize to anybody I've annoyed with my careless inattention to details. It would also be nice if we paid closer attention to the validity of other numbers and their importance, rather than just those of the Great God Simmons.

Keep in mind, no matter how much you may agree with Simmons (and I do) - he is still selling books. Don't take that as an accusation, just keep it in mind. He has every temptation to let his forecasts slip in an upward manner. If he did in fact say what he did, it would appear to be not so well thought out.

For the record, I have read his book cover to cover. I am not, and have never been a "POD."

It came from this interview.

The prediction was $200 by 2010

I, too, am struck by how "invisible" the problem is.  Not enough oil and natural gas to heat hospitals - that, IMO, is a crisis.

But is the problem visible even in the UK?  Is the ordinary man on the street aware of it, or is it only an issue for those trying to rustle up some oil for their hospitals, businesses, etc.?

For about the last 7 hours, while working on some gas charts and checking TOD periodically, I've been flipping through cable news channels. Most of the time I just let it sit on Bloomberg with the sound down low. Will Somebody please tell me what is going on in the UK that CNN doesn't feel necessary to fill me in on? Are the lights off? Hospitals with no heat? What am I missing?
I was referring to the article previously posted:

There's no crisis, or at least not in the sense of mass infrastructure breakdown.  No sign of the story from either the Beeb or the Grauniad.  The Independent is rapidly turning into the left-wing equivalent of the Daily Express, i.e. very quick to cry wolf if it enables it to splash a doom'n'gloom story on its front page (usually on either Iraq or environmental issues).
No Crisis indeed. But that's only luck. The shortages are real  and if it weren't so warm now, there would be a crisis with all those hospitals with interruptables (dumb)...

Let's hope the global warming keep the UK warm till 2007 when the Natural Gas connector with Norway is finished.
Tight planning, but it seems to work out after all.

Check this out, it is a very good analyses of the current UK gas situation. It explains it all
I read today that the only hospitals with interruptable gas contracts are those with an alternative source of power (oil).  So no problem there, for the moment.
Just for the record, the story I am quoting is from the Guardian, as I sort of pointed out in the post.
Please correct me if I am wrong, but the reason a lot of hospitals and other government functionairies are on interuptible contracts is because all government must be efficient nowadays.  Because people have come to the conclusion that government must run on an "efficient" business model that doesn't require them to run when it will cost them  a great deal of money.  I can understand a manufacturer having a contract like that when energy supplies are a large part of their overhead.  If it costs more to make a product than it can be sold for shut down production.  But government provides essential, life-saving services, and shouldn't make cost it's primary goal.

It's like if the US eliminated medicare because it was too expensive, not realizing that the alternative of not providing health services to older people is even more expensive.

"It's like if the US eliminated medicare because it was too expensive, not realizing that the alternative of not providing health services to older people is even more expensive."

Please explain. Why would it be expensive to not spend money on old people?

Old people go to emergency rooms whether they can pay for it or not.  Emergency room care is much more expensive than preventive care, and public hospitals are obliged to take indigent patients in emergencies.  Without Medicare you increase the cost and shift it to local governments, with a lower average quality of life for citizens at large.
We're getting to that, it's just that there are a lot of social programs and it takes time to kill them all.....
It should be noted that the reason (primarily) that people take interruptible contracts isn't so that the gas company will slap them on the wrist and say "no more gas for you, its too expensive." No one actually hopes that gas will get too expensive. It turns out that interruptible contracts are cheaper, every day, so government (that has been mandated to operate on a shoestring) buys those hoping (Or blissfully ignorant) that no gas shortages will arise. This of course also makes sense if you have a business that has high energy costs AND wouldn't operate if prices breached a certain barrier, but for places whose job it is to keep people alive? I would go with operating at a loss (and installing PV water heaters, insulating rooms, and using less of those really bright lights, turning down the therm in rooms w/o patients....).
HO, this seems like a good time, given the UK's declining North Sea gas supply, for people to take another look at your Gas fields also deplete, but faster post.

As far as the reporting of the Russia/Ukraine standoff goes here in the US, I get much of my news from NPR and the story, while not invisible, did not get much attention. And now with the UK in some energy turmoil, there is nothing at all. The US is only isolationist with respect to information. Invading foreign countries and screwing with their economies are no problem.
The real difference between a Nat Gas crisis and an oil one is simply that Nat Gas ones are generally regional, while oil ones can be regional or global. The reason is that a tiny fraction of the world nat gas supply is readily transportable due to lack of proper LNG infrastructure. Hence, countries such as the Britain or the U.S. will have problems because of declining supply with lack of import capacity. Regarding nat gas prices in the U.S., if it is greater than $20 for any prolonged period of time, at best we will see decreased consumer spending, higher inflation, decreased economic growth rate, and consequent higher heating oil and crude oil costs. At worst, we will see a recession induced by high natural gas prices, a first for us.
While gas supply in UK may be close to the bleeding edge of demand due to season circumstances, thus fuel switching and fuel oil run-downs - as has happened in USA in the past - the latest news of production cuts as Shells major Rotterdam refinery
suggests spot prices for petroleum and diesel will rise, with both UK and USA ultimately needing to increase pump prices.

The big refineries count. Damage to Pernis and to the GOM refineries are the sorts of 'wild card' events that can temporarily reduce demand for gasoline.

Of more importance than petrol is diesel. Petrol is 'luxury'. Diesel is 'essential services'. Higher diesel prices must increase costs across the board and ratchet any effect of economic downturn.

The bumpy plateau continues.