• The purpose of the the Economic Policy Centre (EPC) is to promote high quality research and debate across all areas of economics in a free democratic society.
    The EPC's vision is to close the gap between economic policy and knowledge. Ultimately it brings together economic opinion formers - in academia, business, the media and government - in new and innovative ways.

  • Nuclear pricing in China – at least half the price of the UK

    July 11th, 2013

    As the UK is going through torturous negotiations over the strike price with EDF which may be as high as £100 a megawatt hour, troche I was fascinated to read that in China the nuclear price per kilowatt hour has just been set this July at the wholesale level of  CNY 0.43 per kWh  or 7 US cents/kWh – for all new nuclear power projects. At current exchange rates, advice that equates to about £47 per megawatt hour or half what we will probably pay here and right in line with our current wholesale market price.

    Obviously it helps if you are currently building 28 nuclear power reactors and want as much as 400 GWe by 2050 as opposed to one or two within the next 9 years. But it also shows that when it comes to delivering nuclear power on the cheap, buy the UK has a lot to learn.

    If it was up to me, the cheapest way would be to lay a second interconnector cable across the channel and buy nuclear power forward from France over 10 years.  With France rapidly de-industrialising, I suspect there will be quite a lot to go around.

    Energy policy for a less affluent age

    February 3rd, 2012

    Read the full article here. In my role as Energy Policy Adviser to the Institute of Directors, here is my latest contribution with my excellent co-author, Corin Taylor. Unfortunately, far too many people in the energy industry and energy policy circles are stuck in a pre-recessionary timewarp. They just don’t seem to have caught up with the fact that our current raft of energy policies are running far ahead of ordinary people’s budgets and the balance sheet strength of our utilities. Energy policy is not just a question of political will and it really shouldn’t be immune from cost-benefit analysis and some open criticism of the underlying energy assumptions. Sometimes I wonder, does our energy policy have no clothes?

    Read the full article here – Energy policy for a less affluent age.

    The UK Space economy: the present and exciting future

    February 3rd, 2012

    Read the full pdf here.  A special thanks to our brilliant Space Fellow, Jim Bennett – as well as many others – on helping me with this wide-ranging feature article in the latest quarterly publiction of the Institute of Directors. Truth to tell, if you want a positive story about the UK Economy, this is almost the only one going.

    It’s fascinating as well to realise that some of the best places for Spaceports in the UK are in Scotland – which now comes with a new kind risk for investors should it become independent. It seems we are a long way from really fully understanding the costs and benefits of Scottish independence. But with my energy hat on, I for one wouldn’t bet on renewable energy subsidies and oil prices remaining high and stable into the future – which together form a big part of  the Scots Nationalists’ calculations.  Permanence, after all, is the illusion of every age.

    Read the full pdf here – The UK Spaece economy: the present and exciting future.

    Rethinking The Unaffordable – new joint EPC KPMG paper

    July 21st, 2011

    Rethinking the Unaffordable is co-authored together with KPMG and takes an inquisitive look at the assumptions underpinning the Green Transition plan. Whilst asking if we are paying the right amount it also considers the implications on the competitiveness of the UK economy  –  the need to re-open the debate on energy in the UK could not be more urgent.

    Download from here.

     

    2 Reasons for medium term optimism on oil prices

    March 9th, 2011

    Leaving aside environmental concerns around oil, I managed belatedly to find some grounds for optimism to balance my previous post. Ok, it’s only two reasons and they’re about the world in 2015-2025 or so, but that’s the best I could do !

    1. Iraq – really surprised almost no one has picked up on this. Iraqi production is currently around 2.7m bpd but could well reach 9m bpd by the middle of the next decade. This will massively alter the balance of power in OPEC – the Saudis won’t be too thrilled – as Iraq is not part of OPEC’s allocation system. I picked this up in yesterday’s Wall Street Journal Europe in a section by IHS Cambridge Energy Research Associates – of Daniel Yergin fame.

    2. Shale oil – the technology that revolutionised the US natural gas industry – hydraulic fracturing – is now coming to oil. Optimists are saying that shale oil production could cut US oil import needs by 20% within 5-6 years.

    Reasons for pessimism on oil prices

    February 28th, 2011

    Oil prices are going up, the economy is slowing down and Andrew Sentance says interest rates should go up – deja vu anyone?

    I don’t share the pessimism of many about the revolts in Tunisia, Egypt and Libya. So what if it is somewhat directionless and entirely unanticipated – that part of the world has tried foreign rule, autocracy, military and religous dictatorships and found them all wanting. Virtually none of these protesters are crying out for a return to or enhancement of any of those systems.

    It’s not a fashionable view, but I’m increasingly convinced that Francis Fukuyama will be proven correct that the end of history – i.e. that all paths will eventually lead to the least bad system – liberal democracy – because everything else is deemed to have failed. It is a question of time, albeit a long one.

    Having said that, I certainly don’t share the optimism which seems a little too prevalent on oil prices and here’s why;

    Optimist argument No. 1 – Libya is only 1.7% of world output and Saudi Arabia can easily close the gap.

    Wrong for the following reasons.

    The cut of crude that comes out from Saudi is high sulphur and harder to refine. Refineries are built to refine a certain type of crude and they can’t easily switch over.

    Although oil is a globally fungible commodity, this has a highly regional impact because most of Libya’s exported crude went to Italy, Germany and Spain.

    Even if Saudi cranks up production the oil will still have to be extracted, refined and transported. That takes time and would require a change of existing agreements.

    Optimist argument no. 2. The IEA will release up to 1.6 billion barrels of spare inventory which will keep prices down.

    Wrong again. If you reduce the cushion for supply disruptions by lowering reserves the market will price in higher risk and higher prices. The real question is who can lift supply and immediately? Answer – no one really.

    Optimist argument no. 3. OPEC are sensible enough not to drive the world economy into recession and will quickly agree to lift production.

    Even more wrong. OPEC have a terrible record of controlling prices – they can’t – and they are not slated to meet to discuss new quotas until June 2nd 2010 in Vienna. And that’s assuming that they would agree in the first place about what an acceptable price is and not cheat on their quotas.

    This unrest also has long-term implications for the investment risk models of the sorts of long-term fixed capital projects needed to meet future oil demand. Typically it’s a 10 year gap between oil discovery and bringing it to market. I wonder how much money is going to be written off in Libya?

    Of course, this is a one-sided post meant to take issue with received opinion.

    I’ll be balancing it with a grounds for optimism angle later in the week.

    Oil price outlook for 2011 – from $90 to . . . ?

    January 5th, 2011

    Oil prices – now at $90 a barrel – rose in 2010 by 15% and by over 8% in December. So as I explained today on Al-Jazeera TV, I’m not surprised that Faith Birol, Chief Economist of the IEA  is worried about the impact of oil prices on the (largely OECD) recovery. That’s because for now, oil is still the indispensable economic input, so you can’t cut it back, just spend more on it and  curtail expenditure and investment in other areas.  Put simply, higher oil prices are a problem in non-producing countries because they manage to dampen agregate economic activity  whilst being simultaneously inflationary.

    OPEC is always walking a tightrope between the higher oil prices demands of its producers and finding a price low enough to suit mostly Western consumers without turning them away. Would that they know where precisely that balance was and even more, reach it !

    And for all that, it’s not like they even agree amongst themselves – at the last OPEC meeting in December, the Saudi Oil Minister, Al Naimi, said he favoured an oil price of “$70 and $80 a barrel” whilst his neighbouring Kuwaiti confrere, Sheikh Ahmad al-Abdullah al-Sabah, today said he considered oil at $80 to $100 a barrel to be fair price. Is that just because it’s gone up in the meantime?

    Anyone who asserts they know what the oil price is going to do is foolish in the extreme. But we can sketch out scenarios of what might happen. The first point is that OPEC are not scheduled to meet again to discuss quotas until June 2011. That may well change. The second is that some analysts believe that the US Summer driving season just might lift the price of oil to $120. And the third influence that outweighs everything else are extreme events like;

    i) A Mideast War – involving Iran trying to close down the Straits of Hormuz in response to a US and/or Israeli attack

    ii) A trade dispute between the USA and China – forcing China to revalue its currency upwards and thus effecitvely make oil cheaper (because it’s priced in dollars) and massively increase Chinese demand for the black stuff

    iii) Tensions going hot between the 2 Koreas

    iv) Some sort of collapse of the Euro – leading to mass selling of Euros and a retreat to quality – commodities like oil and gold

    Hopefully, none of these will happen. But the risk is there and higher oil prices will come with them or even some inkling of their possibility.

    One way or another, we do seem to have reached a new trading range – where $80 is the new $70 – as a recent note from Lombard Street Research made clear. Maybe next year OPEC leaders will be saying a fair price is more like $110 a barrel . . . Plus ca change !

    Long-term strategy depends on reweighting the balance of cost and value

    October 20th, 2010

    “We have all but lost the capacity to think strategically . . . we have simply fallen out of the habit, and have lost the culture of strategy making.”

    So says, according to Philip Johnston of the Daily Telegraph,  a report of our Parliament’s Public Administration Select Committee –  not yet up on their website, please let me know when it is – and it’s hard to disagree.

    For me the answer is quite stark – government has placed far too much emphasis on cost rather than value. Only if this is rebalanced with long-term incentives, will we ever develop large, long lifespan strategic assets. And as Johnston rightly points out, nowhere is this more true than post the Comprehensive Spending Review,  in energy or defence.

    What is the value of aircraft carriers’ conventional deterrence, low and high intensity warfare air support and disaster relief capabilities over 40 years that these mobile airbases can bring to anywhere in the world?


    Equally, what is the value of a Severn Tidal Barrage’s 100% predictable power output with zero fuel costs throughout its 120 year lifetime?

    In both cases, their long-term value relative to their initial cost, is inordinately high. Would that we as a nation could recognise that and countless other examples too.

    The unwelcome consequences of a US-forced Chinese Yuan revaluation

    October 12th, 2010

    Over the summer, I really savoured reading Tom Bower’s book, OIL – Money, Politics, and Power in the 21st Century which – covering 1990-2009 – has become the unofficial sequel to Daniel Yergin’s The Prize: The Epic Quest for Oil, Money, and Power – covering the 1850s to 1990.

    So if you’ll forgive the pun, I’d like to crudely summarize some of the best points from Bower’s book thus;

    1. There’s actually plenty of oil – it’s just in the wrong place, too many restrictions on its extraction, limited finance and bottlenecks in refineries
    2. The immensely diverse oil industry – downstream, upstream, traders, engineers, accountants, politicians, economists, refinery workers etc. all work in silos and don’t interact, less still understand each other
    3. So no one apart from the occasional brilliant or lucky trader has any lasting insight on the price of oil which has a massive impact on the investment horizon
    4. As for the IOCs (Independent Oil Companies)
    5. BP under Lord Browne was very go-ahead trying to boost reserves and sloppy on safety and outsourcing engineering (this before Deepwater Horizon)
    6. Shell prospered but was often beset by Anglo-Dutch internal squabbles and having rings run round it by  Oligarchs, Greenpeace etc.
    7. Exxon is a stultifyingly dull bureaucracy, obssessed with safety, has absolute faith in itself and is usually right
    8. As for the NOCs (National Oil Companies)
    9. They may have the oil, but they don’t have the technology or the finances and tend to overstate their reserves
    10. And they constantly strive to renegotiate settled deals with scant regard to reputation or the balance sheets of their partners
    11. Oil producers are ultimately far more dependent on consumers than the opposite
    12. It’s all about achieving an elusive balance between governments, regulators, markets and nature

    For all that, compared to preceeding years, oil prices have now gone through a year of relatively high stability, largely in the $65-$80 range which makes me think it won’t last.

    So I keep wondering about this piece in the Wall Street Journal a few days ago, The Trade and Tax Doomsday Clocks. Whilst being critical of the Currency Reform for Fair Trade Act which would mandate the US Department of Commerce to take a foreign country’s currency interventions into account in determining whether its trading practices are unfair (crazy in my view – see my earlier post) it makes a fascinating point about the impact such a policy would have on the price of oil;

    …an unintended consequence is that it will make China an even more voracious competitor for oil. That’s because oil is priced in dollars, so a revaluation would make it cheaper in yuan terms. Remember, during the period from 2005 to 2008 when the yuan was revalued under similar political pressures from the U.S., the price of oil rose, not coincidentally, to $147 per barrel from $60. That could happen again—and it would be another inflationary tax on U.S. consumers.

    I looked at this chart (CNY:USD 5 years)  and this seems to be true. The roughly 16% gain in the Yuan over the last 5 years against the dollar is quite well correlated to the jump in oil prices that we had over that period. So maybe we now have a clearer idea with recent history in mind of what can cause oil prices to go up again?

    The bottom line is that the USA has had all the benefits of having the global currency – cheap credit, low transaction costs and enormous diplomatic leverage for too long to now turn round and demand China revalues their own which will cost the Chinese and the USA dearly if not managed gradually. And should such a dispute kick off, all sorts of unintended consequences like higher oil prices will hurt the rest of us. I really hope America’s politicians pull back from the brink on this one. Because as I wrote back in Spring 2007 for World Finance magazine, The nightmare of a Chinese economic collapse, the consequences could be very ugly.

    On Greenland’s diversified future . . .

    September 26th, 2010

    Earlier this week I was interviewed on Al-Jazeera English about the discovery of gas just off the coast of Greenland by Cairn Energy. As is always the case, whenever there’s a new hydrocarbon find, there is a great deal of excitement which all too often turns out to be unjustified. So I urged some caution mentioning that it can be up to 10 years before oil discovery and bringing it to market.  And I daresay a great deal of the oil’s exploitation depends on high prices – which should not be seen as a given.

    That said, I couldn’t help but laugh when I found out how unpopular Greenpeace is in Greenland. The route cause of this is their opposition to seal-hunting which pretty much shut down one of their two export industries – seal furs. So I’m not surprised they’re not getting a good reception this time round.  And let’s face it, Greenlanders aren’t the sort of people to care what outsiders think of them – they are the only territory to have joined and left the European Union. I can just see Brussels Eurocrats choking on the audacity of that one !

    Right now, the biggest industry in Greenland is prawn processing – so it’s only natural they’d want some diversity away from that.