Petroleum Pains: London Bridges Falling Down

The British government announced this week that greenhouse gas records indicate the country was leading the way in efforts to combat climate change. London reported that carbon dioxide emissions fell close to 10% in 2011, compared with the previous year. Production of renewable energy, meanwhile, was increasing. Against that backdrop, however, is an economy barely making its way out of recession, high utility bills for March and record high prices at the pump, or at least the ones still open.

British Department of Energy and Climate Change Secretary Edward Davey declared that a 7% drop in greenhouse gas emissions was “more evidence” that his country was tackling climate change head on. “Carbon emissions are down, homes are more energy efficient and low carbon power is up,” he said in a statement.

The DECC announced that carbon dioxide, considered the main component of greenhouse gas, made up about 84% of total emissions in 2010. Provisional estimates from 2011 indicate an expected 8% decline, compared with 2010 levels. Meanwhile, low-carbon electricity resources increased more than 5%, with natural gas leading the way. For renewables, hydro- and wind-generation increased by an impressive 55% in 2011, compared with 2010.

But there is a dark side. Coal still accounts for about 30% of the electricity generated in the United Kingdom. Oil production was 17.5% lower than in 2011. Production of natural gas, which was praised in the assessment of electricity, was down more than 20%, and gross imports where greater than gross production for the first time in 45 years.

Darker still are the reports that the British economy slipped backed into recession. The Organisation for Economic Co-operation and Development said the UK economy shrank 1.2% from October to December and should contract another 0.4% during the first quarter of 2012. Though British Chancellor George Osborne said he thought the OECD was a bit pessimistic, darkening the clouds more for London was the Friday decision from Washington that there was enough non-Iranian oil on the market to warrant additional sanctions against Tehran.

James Burkhard, managing director at IHS CERA, has told U.S. lawmakers that geopolitical tensions were stressing global energy markets. Tightening sanctions on Iran, he said, is complicated by a decline in spare oil production capacity. In 2010, when the global economy was mired in recession, spare capacity stood at around 5 million barrels per day, in part because of lower demand. While Europe still has its problems, other national economies are improving, meaning spare capacity dropped to around 2.5 million barrels per day.

That spells trouble for London.

Back across the pond, the DECC said electricity bills were up 8.5% from 2010 levels and natural gas bills were up 9.3%. With U.S. consumers crying foul over $4-per-gallon gasoline, British consumers are in a state of panic with retail fuel prices climbing more than 80% due to a tanker-driver strike. Sure, Davey is right to say that greenhouse gas emissions are in decline, but so is the rest of the country, it seems.

By Daniel J. Graeber of Oilprice.com