Have UK consumers felt any real benefit from low oil prices? No - and they won't, despite the fact that oil prices are likely to halve in the foreseeable future.
As we all know, oil and gas prices are determined largely by the volume of production. Major investments made when the oil price was at the $120 mark have led to overproduction. This will continue for some time as the industry is forced to produce at higher levels than is economically viable today to service the debt taken on to finance those investments. As a result, the price is likely to fluctuate around $30-40 per barrel for another two years. The worst-case scenario in a recent Goldman Sachs report sees it dip to $20.
This may sound like good news for Britain's motorists and energy consumers, but don't get your hopes up.
At such low prices the daily cost of maintaining operators' enormous infrastructure - 70% of which is offshore - becomes prohibitive. To make ends meet, operators are likely to reallocate the savings from low prices to meet processing and transportation costs. In the end it's the consumer who pays for the operators' losses, which is why the costs of petrol, gas and electricity have changed little, if at all. The threefold slump in the oil price has reduced UK consumer prices by a mere 15%.
But it doesn't stop there. The current investment programme will run for another 2-3 years. With the world average cost of production currently at $20-25 per barrel, new investment will fail to materialise in a $30-40 per barrel market. Production will slow to the point at which demand is no longer met, but the industry won't be in a position to respond. To meet that future demand we have to plan for it today, which we're not doing. The uncomfortable fact is that while overproduction translates to a slow and modest decline in retail prices, a slight shortage causes a sharp rebound. Prices across all consumer sectors will skyrocket and ordinary people will again pay the price for the government's inability to plan ahead.
In yesterday's high-price market, banks supported the oil price via futures and derivatives. After the financial crisis and subsequent regulatory changes, those upward pressures weakened. Governments could and should have stepped in to act as a dampener by correcting tax regimes and regulatory environments, but they didn't.
In the UK, the government has singularly failed to adjust North Sea tax regulations to encourage investment and growth. We're already seeing the first signs of our future energy shortage. Production is down from 1.2m to 0.8m barrels per day and this trend is set to continue. The last two years have seen the highest percentage fall in production and the largest outflow of investment from the UK energy sector in at least a decade.
In this context, the Chancellor has been desperately trying to breathe life into the PR project that is fracking, making it look increasingly like Frankenstein's monster. Energy ministers change annually. The government has done nothing to support UK suppliers, offering huge, no-strings tax concessions to large international operators without any requirement for British content. Having made promises that UK companies would be in the running for these contracts, they're sitting on their hands as work disappears overseas to suppliers who are not just unqualified, they're not even cost-effective.
Amber Rudd, our fifth energy minister in five years, is now hostage to the Oil & Gas Authority, which itself is largely composed of the energy lobby. Their interests conflict with their statutory mandate. They have no interest in seeking a good deal for British consumers or supporting British fabricators, whom they naively assume are too expensive when the opposite is true; our Asian and Middle Eastern competitors have been over budget and massively over schedule time and again. In contrast to her predecessor Michael Fallon, not once has Ms Rudd defended the British supply chain.
Last week's news of the abandonment of a major carbon capture project in the north is yet more evidence that Amber Rudd's department has failed utterly to develop a coherent energy policy. Their performance so far has been marked by broken promises and u-turns, and we're beginning to pay the price of such an unpredictable environment. They have no forward looking strategy despite the fact that energy continues to be one of the British economy's locomotives. A minister has a responsibility to the electorate - they have to think ahead and act decisively at critical junctures to tackle the challenges facing Britain. It is time for DECC to act.
Nearly every G7 country except the UK has managed to transfer the dip in energy prices to the pockets of their consumers and businesses. While these countries are pushing on with long term plans for a stable energy future, the UK government is still trying to figure out what works best. Fracking? Conventional oil & gas production? Nuclear? Importing from continental Europe? Coal? We're in the dark, literally as well as figuratively.
It's time for urgent action from the government to wake up to these market forces and what they mean for British consumers, British firms and British industry. We've failed to benefit from the plunge in prices; it's now essential not to be caught out by the rebound.
Alexander Temerko is a British businessman and a major donor to the Conservative party. He is an expert and major investor in various segments of the energy sector as well as deputy chairman of the UK-based OGN Group, which manufactures platforms for oil rigs in the North Sea.