Providing for the UK’s Energy Needs

Oil Price

Oil Prices in 2004 – 2005: The average Dollar price of Brent crude in 2004 was $38.2 per barrel, 30% higher than in 2003. Brent crude price had varied around $25-$30/bbl since 2001; however by March 2004, crude oil prices started to rise, peaking at around $53 in October 2004. Crude oil price then fell back to $40 - $45 over the remainder of the year before beginning to climb again in 2005. Brent crude reached a daily peak of $56 by April 2005, the latest date for which oil price data is available and prices continue to remain highly volatile. HM Treasury has based its 2005 budget forecast on a forward oil price of $40/bbl.

Figure 15: Brent Crude Price 2004 - 2005

Sterling and Dollar oil prices have shown an increasing divergence over the last two years as Sterling has continued to strengthen against the Dollar, as shown in figure 16. To an extent the change in the exchange rate has partly mitigated the impact of the rise in oil prices on the UK economy. In nominal terms the Dollar annual oil price rose 34% between 2000 and 2004 whereas the Sterling oil price rose 10% over the same period.

Figure 16: Sterling vs. US Dollar Brent Crude Price 1999 – 2005

Over the last 30 years crude oil price has averaged at around $33/bbl or £25/bbl in today’s money. There have been two marked price cycles, the period through 1973 to 1985 where the price of Brent crude per barrel averaged at around $47 (£39) and the period 1986 – 1998 where the price averaged at $24 (£16). In the period since 1999, oil price has averaged at $30 (£19) in 2004 money.

Figure 17: Historic Crude Prices

The current rise in oil price has been caused by a number of factors including strong growth in global oil demand particularly from China, continued global political tension, lower stock levels and uncertainty on security of supply. At the same time refining capacity is becoming a constraint both in the United States and Europe, exacerbated in part because many of the new oil supplies being developed globally are heavier crude oils which are less suited to the existing refinery capacity.

In response to the recent rise in oil and gas prices, companies have raised the prices they use to evaluate new investment opportunities (now $20-$30). New developments take 2-7 years to bring into production and will be producing for 10 – 25 years. Consequently, investments are not driven by short term oil and gas price movements, but must take a longer term perspective.