As the price of brent crude plummets, pricing levels for UK wholesale gas prices are crushed and dependence on gas imports increases.
Analysts say that Brent crude prices below $40/barrel could play a major factor in exerting strong downward pressure on the future cost of wholesale gas due to oversupply.
Members of Opec (Organisation of the Petroleum Exporting Countries), which controls 40 per cent of world oil exports and includes Saudi Arabia, are due to meet later this month to discuss the global oil market.
Most of these nations need higher oil prices to fund rising government spending, so tend to limit their output and supply when prices are low in order to boost prices and income but Saudi Arabia – the biggest oil exporting nation in the world – has signalled that it is not interested in taking action to cut back on production.
We believe this may be a ploy to drive down production from US shale rivals as they will be unable to compete on price.
While this brings down the cost of gas imports, the lower price could hasten the decline of North Sea gas production and increase the UK’s import dependency. Up to £55 billion worth of North Sea oil projects scheduled for 2015 could also be cancelled due to the falling prices.
Ben Wetherall of Icis, explained: “Despite the weak fundamentals and prospect of cheaper imports, one potential impact of a sub-$40/bbl environment will be to make it even more difficult for suppliers to maintain current production levels in the North Sea and this may ultimately hasten the UK’s growing gas import dependency.
The weaker oil price environment has been a major factor in exerting strong downward pressure on UK and global wholesale gas prices throughout 2015. The UK price of gas to be delivered in 2016 has fallen by 30 per cent since the beginning of the year, and closed at its lowest point earlier on Friday.”
Tumbling prices have already had a profound impact in the UK, where three times as many UK oil and gas firms have declared insolvency this year compared with 2013, leaving us even more dependent on gas imports.
Looks like we’ll need to find a new homegrown source of gas sharpish in the UK – is fracking the answer? With fracking being given the go-ahead, this could be the means required to strengthen energy security and avoid potential risks to UK energy supply.