Providing for the UK’s Energy Needs

Oil Prices

High oil and gas prices both contributed to and constrained activity in the oil and gas sector in 2005. While they had the effect of making a greater volume of reserves economically attractive to recover, they also put pressure on resources and increased capital development and E&A costs, reflecting a global trend.

Figure 17: Daily Brent Crude Price 2003-2006

Linkage to European, oil indexed markets and a tight gas supply-demand balance have contributed to the average NBP day-ahead gas price rising nearly 60% in 2005 to 41p/therm, compared to 24 p/therm in 2004.

The average crude oil price increased by 40% to $54.5/bbl in 2005 compared to $38.3/bbl in 2004. These were 2 of only 5 years in history where the crude oil price in nominal terms has exceeded $30/bbl. However when the oil price is considered in real terms, taking inflation into account, the current high prices are put into context. It is then seen that over the last six years, average prices expressed in today’s terms have exceeded those of the previous twelve years, but are still not touching those experienced in the late 1970s and early 1980s.

Figure 18: Annual Brent Crude Price 1965-2005

When general inflation is taken into account, the volatility and cyclical nature of oil prices are much more apparent. Whilst the forward curve has an impact on investment, it continues to be seen that investments are driven by long term experience of oil price rather than recently seen prices.