Tag Archives: energy

Latest oil price slump shows that black gold has lost its lustre for good

Oil tumbled more than two per cent yesterday, edging perilously close to an 11-year low despite growing fears of World War Three kicking off between Saudi Arabia and Iran.

You’d think that the risk of disrupting supply from two of the world’s largest producers would rattle traders, but no! Late last night you could buy a barrel of brent crude for a little over $36 (£25) – small change compared to the $115 highs of Summer 2014. Prices had trickled down to an 11-year low of $35.98 just before Christmas.

I’ve been bear-ish on oil for quite some time now despite some spikes throughout the year and I still think it could drop to $20 a barrel. But increasingly the market consensus appears to be that oil will rise in the medium term.

The typical view from people I speak to is that Opec (for which read Saudi) will keep production high, which will keep prices low by creating a supply glut. This in turn will cause other producers (for which read the US) to cut their output as they can’t make a profit and eventually this will push prices up as there will be less oil around to meet the demand.

I think this is a far too simplistic a theory.

Firstly, I think the decrease in production, namely from the US, would have to be incredibly dramatic and it would take quite some time to show up due to their mammoth stockpiles of oil. This would be a long term not a medium term effect – and would only work this way if there are no other mitigating factors. I wonder if the hand of government would come into play if the mighty US lost its booming shale industry that was turning it from a net importer to a net exporter of energy?

Secondly, this theory only works if demand stays the same. And here lies the unknown. With growth in China – the world’s largest consumer of commodities – having slipped back into second gear, will there be enough demand to keep oil prices high? The market volatility in China this week shows that no-one really has the faintest idea about what’s going to happen.

Meanwhile in the West, increased energy efficiency measures and investment in renewable power sources mean that oil isn’t the master of the energy market that it once was. There are even predictions that the West’s energy consumption will decrease by the 2030s.

Why does everyone assume that oil prices must, and will, stabilise at a higher price? Surely a lower price could eventually become the new normal and economies would have to adapt or die as a result?

Are you an oil bull or a bear? Email info@hotcommodity.co.uk with your views.

Happy New Year to you all!

Why we need to give up on UK steel

As Jennifer Aniston’s relentless array of terrible movie roles demonstrates, sometimes you just need to accept something isn’t working, will never work and move on. Because if you don’t, you will be throwing money down the drain that could be better spent elsewhere and will inevitably look back on it as a costly mistake.

Just as Jen should put the rubbish rom-com scripts down, the UK’s steel industry needs to accept its shortcomings and cut its losses.

Over the past few months, mill closures and job cuts have grabbed headlines, with the UK’s steel crisis blamed on a handful of things: the dumping of cheap steel from China; high energy costs; a strong pound; and high business rates for capital intensive firms.

Out of these factors, China has broadly been seen as the largest culprit in making UK steel unprofitable. After a slowdown in the world’s second largest economy, the People’s Republic has had a surplus of steel on its hands that it has been offloading for a cheaper price. Plentiful state subsidies give Chinese steelmakers an even more unfair advantage in the global market, its critics say.

I’m not disputing the validity of these arguments. China is a big problem. Energy costs and business rates are higher for steelmakers here than overseas. But I do not see any way that UK steel could become truly profitable without heavy state subsidies.

The industry has received £50.4m from the UK government since 2013 to offset environmental levies and is currently waiting for EU state aid approval for the Energy Intensive Industry Compensation Package, which will provide hundreds of millions of pounds for energy-intensive industries including steel.

And the sad truth is it would take even more than this to keep it afloat, due to the myriad of problems hammering the sector.

European politicians have this week promised “full and speedier” measures to address Chinese dumping, but knowing Brussels bureaucracy this is likely to be nothing near speedy, if anything is achieved at all.

Even if China were tackled AND the UK government lowered business rates AND energy rates, you still have the strong pound to worry about – and the fact that it’s cheaper transportation-wise to make steel in countries such as China, which are closer to where iron ore is mined, especially as the end-user is often in the Far East.

For me, the situation draws immediate parallels with UK coal. We still get a significant part of our energy from coal, yet our coal-fired power plants continue to shut down. Instead, we rely heavily on cheaper, imported coal. We simply can’t compete on price.

It may seem harsh to want to curtail support for domestic industries and I am not intending to diminish the devastating impact of job cuts on local communities in any way. But the UK needs to look to its strengths and replace investment in loss-making industries with investment in new ones.

Rather than provide a temporary panacea for steel plants with a support package that will inevitably run out and need renewing, why does the UK government not invest in the communities affected, providing new jobs in more sustainable industries?

Giving up on UK steel does not mean giving up on UK industry – it’s about adapting to our strengths and accepting our weaknesses.