John Whelan: Switching power stations back to oil may be necessary

A barrel of crude oil has dropped 20% from its high point in July and is set to fall by a further 10% in 2023. Picture: David Creedon

In the midst of this hot August weather, people are shivering over a looming winter of high heating bills as the war in Ukraine continues to drive rampant increases in gas prices. Yet, there is some potential respite in the oil market.

A barrel of crude oil has dropped back 20% from its high point in July and is forecast to fall by a further 10% again in 2023, according to the US Energy Information Administration (EIA).

Driving the fall in prices is the ongoing negotiation by the Biden administration to settle its differences with Iran and enable a return to crude oil exports from this sanctioned country.

Last week, Saudi Energy Minister bin Salman flagged the possibility that OPEC+ nations could cut production to counter the falling price due to what they called “disconnect” between supply and demand and the potential return of crude exports from Iran.

However, the more important driver of the recent fall in crude oil pricing is China and India picking up a large share of Russia’s sanction-bound crude. Russian oil accounted for up to 20% of total Chinese oil imports in June, making it China’s largest supplier.

Russian crude output subsequently has not plunged to the depths anticipated by analysts, leaving the output from OPEC, as well as the US, available to meet the rest of the global demand. This has led to the prospect that the global oil market will stay in surplus for the rest of this year and into next.

Volatile oil prices

In the past decade, crude oil prices have been especially volatile. Their inherent link regarding short-term changes in demand and supply mean that oil prices are erratic by nature. 

The last major spike in oil prices came in 2008, at the tail end of a decade-long energy crisis.

Since the 2008 financial crisis, many commercial developments have greatly contributed to price volatility, such as economic growth by countries like China and India, and the advent of hydraulic fracturing and horizontal drilling in the US.

The outbreak of the coronavirus pandemic and the Russian war in Ukraine have added to the volatility. However, current prices are still well below the all-time peak in 2008 when inflation is taken into account.

And while Iran continues to be a wildcard in the global oil supply picture, a nuclear deal seems closer than it has ever been and, if finally agreed and sanctions are lifted, significant oil volumes are expected from Iran, with the consequent cooling in oil prices.

All of which could prompt a gas-to-oil energy switch from the power sector, despite the objections from the Green Party.

Gas prices increase

Natural gas is the largest source of electricity generated in Ireland, accounting for 52% of all electricity generated, according to the SEAI. But as gas prices have risen much faster than oil on international markets, electricity prices in Ireland have risen sharply. 

In the second half of 2021, residential gas prices increased 27% compared to the first half of the year, with businesses facing a 65% price hike in the latter half of 2021.

The price escalation continued into 2022. Electric Ireland announced plans earlier this summer to increase residential electricity bills by 11% and gas bills by 29%, with effect from August 1.

The Government is facing calls to address rising energy prices with similar interventions to those seen across Europe, including policy changes, subsidies, tax cuts and price limits. Perhaps a shrewder move would be to let the ESB and other power station generators move back to oil, in the short term.

A similar short-term opportunity exists in allowing data centres, which take up a large swad of electricity, to generate their own using oil-based units. 

Equinix, the world’s biggest data centre operator, has a range of major facilities across Ireland. It recently announced that it is stockpiling generator fuel, to counter the threat of winter blackouts.

Equinix in their press release said they were buying extra shipments of diesel to provide backup power to ensure continuous operations at their European sites.

John Whelan is a consultant on Irish and international trade