Asia Century Institute

The financial crisis is having an interesting effect on perceptions of policy makers to limit the risk of shifting developed economies to a less carbon intensive track. In the US for example the financial crisis has elevated the renewable industry to new heights with key business and government leaders touting the industry as the next IT industry. However, in Australia the opposite seems to be happening with labour government stalling and flip flopping on the issue.

The Australian government has recently called for yet another inquiry on shifting the economy to a less carbon intensive footing.  This has occurred partly in response to whinging from big mining companies here that have really missed the point about this completely. The change would have little or no effect on them, if anything providing new business opportunities or is it just policy paranoia creeping in.

Government intervention is happening whether they like it or not and it will just be a question of what form the intervention takes. Surely, business would benefit from the policy mechanism that provides greater choice ie. an emissions trading framework. Multinational companies have already limited their risk exposure to carbon policy changes here in Australia by being involved with the emissions trading scheme in Europe.

There is only really an upside to increasing the competiveness of the economy and business.  What is stopping Rio or BHP offsetting any exposure which quite frankly is very small by investing in making their head offices more environmentally friendly. It could almost offset any potential carbon exposure or travelling carbon neutral. The BHP office in Melbourne has a lot of glass you could just turn half the building into a solar panel. Surely there are potential sources of generating income and cost cutting measures if emissions trading were implemented. Which would only be of benefit to big business in Australia and emissions trading would provide business with choice.

The emissions trading market will be linked to the Renewable Energy Certificates scheme and there will be substantial trading between the two markets to limit the risk exposure of business to any proposed carbon constraint. The emissions trading scheme and REC’s will be legislated secondary markets to the national electricity market, which currently does not include Western Australia.

The global economic crisis resulting from credit squeeze in the United States has had a four-fold effect on the energy sector.

·         The first has been the additional public sector funding of large infrastructure projects due to the drying up of private sector liquidity.  

·         The second has been the fall in revenues of energy companies due to the price decrease in the fourth quarter of last year.

·         The third has been the economy wide ramifications, particularly exchange rate depreciation due to the decline in revenues for oil producing countries.

·         The fourth has been the delaying of private sector energy projects.

There has been a fundamental shift in capital markets with market risk diverging even more so over the last 6 months than from the risk free rate. The debt premium wedge is expanding as lenders and borrowers become more risk adverse as well as monetary cycle of most developed economies start heading south.

The decline in oil prices has resulted from a number industry and macro events this has included the traditional lag in capital investment, the deteriorating value of the US$, a slight decrease in demand, and the decrease in speculation in the market.

The speculative aspect of the market was limited for a short time by a ban on short selling when commodity prices hit their peak. The ability of markets to adjust in a period of instability has been awkward. A limited amount of information regarding production decisions by OPEC and non OPEC members and the increase in awareness of the limitations of OPEC decisions on the market has also led to a downward momentum on the price.

The cyclical aspect of oil prices has also come into play, particularly in the US and Europe. The relatively mild winter in US and the debacle in European energy markets resulting from a state incentivised system in Russia have also led to further pressure on prices.

The higher oil prices in the US earlier in 2008 resulted in consumers downsizing to more fuel efficient vehicles at the same time heating oil prices haven’t seen any upward pressure at all. 

Ukraine's geographic location makes it an ideal corridor for oil and natural gas to transit from Russia and the Caspian Sea region to European markets (see EU Ukraine Oil Map).

According to Ukrainian oil ministry data, Ukrainian oil pipelines transported an average of about 900,000 bbl/d in 2006, a decrease of 4 percent from 2005. Approximately 22 percent of Russia’s 4.1 million bbl/d crude oil exports either transited Ukraine to reach European markets or were consumed domestically.

The exports flow via the Druzhba and the Pridnieper pipelines to Slovakia, Hungary the Czech Republic, and the Black Sea. Transit tariffs are discussed in great detail at the Energy Charter Treaty website.

Gas prices in Europe are always renegotiated at the coldest time of the year Christmas when everyone is freezing. No other company keeps Europe, and increasingly Asia, on tenterhooks more than Gazprom.