Fuel for Thought – Mar 2nd

02 Mar, 2012

Liquidity life support and energy prices:  Two of the main impacts of the European debt crisis on energy markets have been falling commodity prices and tightening capital constraints.  Both these factors have eased to some extent in 2012, primarily as a result of the introduction of the European Central Bank’s LTRO liquidity programme.  While the LTRO prevented a systemic banking meltdown last December, it does not address the underlying causes of the crisis.  It is a central bank’s job to provide liquidity but this only treats the symptoms.  With European governments seemingly incapable of mustering the political will to tackle the core issue of sovereign insolvency, the LTRO is a bit like feeding opiates to a crack addict.  It is only a matter of time until the liquidity euphoria wears off and the crisis returns.

The Wolf on shale gas:  Ten years ago shale gas was a specialist discussion topic that only really generated excitement amongst more innovative US gas industry geologists and engineers.  A decade later, shale gas has evolved into a topic of global economic importance.  This is illustrated by the FT’s excellent Chief Economics Commentator Martin Wolf, who published a feature article on shale gas last week.  Wolf outlines the compelling potential that shale gas offers as a relatively abundant and low carbon fossil fuel.  As we have done in several articles he also notes some of the substantial challenges the industry faces as it matures.   Perhaps the most interesting point he makes is the importance of cheap energy to fuel global economic growth, and the threat posed by increasing energy demand from developing economies.  These are issues likely to underpin the political momentum behind shale gas extraction.

It is not ‘business as usual’ in the UK: The threat of a capacity crunch in the UK power market as a result of plant retirements this decade is a well discussed topic and we have presented our view.  In a White Paper released this week, Bloomberg New Energy Finance presents a view of orderly transition.  If you can convince yourself it is ‘business as usual’ in the UK power market then their story is comforting.  Growth in renewable and gas generation supports supply while efficiency and economic slowdown constrain demand.  But the mix of EMR policy uncertainty, capital constraints, anaemic spark spreads and planning constraints is a cocktail that may quickly jolt you back to reality.  Scenario forecasts that the lights will remain on in a BAU world do not give us much comfort around the risks of a disorderly transition.

Picture of the week

A close up shot of the huge fire which engulfed Tilbury power station this week. 120 firefighters tackled the blaze which started in a storage area containing about 4,000 tonnes of wood pellets.