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Much ado

Despite much catastrophising to the contrary, Rishi Sunak’s cynical reset of Britain’s net zero targets did no more than bring the UK into line with the rest of Europe.  But if you get your news from the BBC or the Guardian, you could be forgiven for thinking that he’d given the go-ahead for a return to the coal age and sanctioned the murder of the first born to boot.  And then, as if to ramp up the howls of outrage, just as that media storm was coming to an end the UK’s North Sea Transition Authority approved the development of the Rosebank oil field, with the Scottish Green Party’s Mark Ruskell helpfully rising to the bait:

“This is an utter catastrophe for our climate and the worst possible choice at the worst possible time. It shows a total contempt for our environment and for future generations.

“Last week Rishi Sunak took a match to his environmental commitments, now he’s taking a flamethrower to what remains of the UK’s environmental credibility.”

With less hysteria, the folks at Pravda were keen to remind us that:

“The plan has faced widespread criticism due to its impact on climate change.  Last month 50 MPs and peers from all major parties raised concerns the oil field could produce 200m tonnes of carbon dioxide.”

We might be forgiven for smelling a carbon credit scam in the making, since by deciding not to develop the field after all, the licence-holders could convert their inactivity into 200 million carbon credits which they could sell to global corporations wishing to greenwash their otherwise environmentally-destructive activities.  In any case, the political/media inspired outrage displays a woeful ignorance of the post-peak global oil industry… most likely resulting from a failure to process big numbers.

To understand this, consider that the global economy consumes a little shy of 100 million barrels of oil per day.  In that context, Rosebank is a tiddler – at best providing some five day’s consumption.  And, as with the neighbouring Cambo field, Rosebank is not a single deposit, but rather a series of smaller deposits contained within difficult undersea rock formations – so that a large part of the theoretical 500 million barrels are likely to be unrecoverable.

Geology is just the beginning of the Rosebank problems.  Although Pravda has a nasty habit of claiming that Cambo and Rosebank are in the relatively tranquil North Sea, they are actually way out in the North Atlantic where they are exposed to the full force of the Gulfstream and Jetstream winds.  Suffice to say that any drilling platform resilient enough to stand up to those conditions is likely to be at the higher end of the cost spectrum – £500 million to £800 million – with an additional £450,000 to £650,000 daily operating cost… costs which have to be recovered from the sale of the oil produced.  And then there is the cost of the infrastructure needed to get the oil onshore.  A pipeline covering the 129km from Rosebank to Shetland, at £1,890,000 per km, is going to cost £244,000,000.  And this is within a UK/European investment environment which is increasingly hostile to further fossil fuel development.  As Juliet Samuel at the Telegraph wrote in response to last year’s energy crisis in the UK:

“The meeting goes like this: ‘We need you!’ say the politicians. The producers scratch their heads as they mull $20 billion, 20-year investments, and wonder whether, when the war is over and the green bandwagon rolls back into town, the politicians will still sound so sweet on them. ‘Your green targets still say we need to shut down by 2030,’ they point out. To which Europe says: ‘Well, of course. Fossil fuels are evil!’”

Of course, if today’s high oil prices could be sustained, and if all 500 million barrels could be recovered from Rosebank, the £37bn income would cover those costs – even with the UK government taking a slice in tax and to offset decommissioning costs.  But those are big ifs.  The assumption that the price of oil can continue to rise to cover any cost of recovery was debunked in practice by what happened following the global peak of conventional oil production in 2005.  Despite economists predicting $200-per-barrel oil by 2010, what actually happened – and what has happened every time since – is that high oil prices caused a major economic shock followed by a depression in which demand for oil fell back bringing prices down again:

Current high prices have been distorted by the supply chain destruction following two years of lockdown and the self-destructive western sanctions of Russian oil.  But although economists and central bankers tend to regard high oil prices as inflationary, in fact the opposite is true… at least over a two-to-five-year timeframe.  As Frank Shostak from the Mises Institute explains:

“If the price of oil goes up and if people continue to use the same amount of oil as before then this means that people are now forced to allocate more money for oil. If people’s money stock remains unchanged then this means that less money is available for other goods and services, all other things being equal. This of course implies that the average price of other goods and services must come off.

“Note that the overall money spent on goods does not change. Only the composition of spending has altered here, with more on oil and less on other goods. Hence, the average price of goods or money per unit of good remains unchanged.”

Now that the excess state spending during the pandemic has worked through, and the entire global economy is in the early stages of a globally-synchronised recession, it would be the most optimistic of oil investors who would gamble on oil prices remaining above $90-per-barrel for the 10-to-20-year development of a difficult and expensive oil field like Rosebank which, like neighbouring Cambo, is only likely to look profitable when oil prices are unsustainably high.  Once the oil price crashes – which will be inevitable as the world economy falls into a deflationary depression – any talk about developing Rosebank will fade away.

In reality, what we are witnessing is the usual pre-election froth through which politicians try to appear to be making significant reforms while nothing changes in practice.  Sunak’s apparent attack on net zero – born out of Labour’s ULEZ-inspired Uxbridge by-election loss in July – is no more than accepting that the UK’s – probably Brexit-inspired – attempt to beat the EU to net zero was always going to unravel given Britain’s long track record of failing to deliver infrastructure on-time or within-budget… in this case, the failure to develop either an electricity capacity great enough to power electric cars or the charging infrastructure needed to allow them to go anywhere.

If the Tories were to unexpectedly win in 2024, Sunak would be on the hook for reaching net zero targets which everyone knows cannot be reached.  But since Sunak will have gone back to his City of London hedge fund by 2035, someone else can be left to carry the can for failure.  Meanwhile, leaning on the regulator to approve an oil field that is likely too expensive ever to be developed gives the appearance of supporting the new oil and gas production demanded by the climate change denying wing of the Tory Party without actually having done anything… merely approving the development of Rosebank is on a par with approving the development of the first colony on Mars – headline grabbing, but ultimately much ado about nothing.

As you made it to the end…

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