This study is ingrained in the critically examining the framework of the energy policies. A demonstrationof the key global challenges and issues that face the world oil and gas industry will be examined in addition to investigating factors affecting the long term prospects of world oil. Premised on the result of the June 23rd 2016 referendum to leave the European Union, this study will explore the dynamics of United Kingdom in relation to other European Union member states and how it will significantly change over the coming years.
As elucidated by George (2013), the exit will have far reaching impact on every sector of the United Kingdom. The major contributor to the economy, the energy sector, is perceived to be significantly impacted due to current depletion in the off shore reserve, the controversies and uncertainties surrounding the unconventional oil and gas industry. Further, the slow growth in the renewable energy sector and the dependence of electricity supply from other EU countries has been cited as the significant factors. As such, the policy framework needs to be revisited to accommodate the wishes of the British people with regard to their coexistence with their closest neighbors and biggest trading bloc.
Notably, this assignment will utilize the SWOT analytical tool in critically analyzing the impact of the recently concluded Brexit referendum on the United Kingdom’s energy policy framework. Particular emphasis will be ingrained in oil.
Framework of the Energy Policies
The tenets of energy policies are ingrained in the manner in which countries opt to address energy development issues that entail energy production, itsdistribution and consumption. Taxation, legislation and international treaties in addition toguidelines outliningenergy conservation approaches are the cited attributes of energy policies. Further, energy policies are premised on a country’s laws that seek to address efficiency and emission standards.
Energy security is an elaborate policy framework governing energy policies. The policy is ingrained in international measures regarding the establishment of treaties, and trade agreements. It is worth noting that the framework of energy issues is based on the concerns of environmental issues. The framework is founded on the need to ensure reconciliation of global objectives and international regulations governing energy production and supply. Study finding of Robert & Daniel (2011) affirm that some states embrace explicit energy policies.
Notably, the European Union has embraced legislated in addition to negotiated internationally policies that emanated from the Coal and Europe’s Coal and Steel Community. Adopted in the European Council in 2005, the energy policyadvocates for mandatory energy policies by member countries. Additionally, the council approved yet another policy in 2007 that bind all the EU member countries.
Particularly, the reduce energy intensity policy in the United Kingdom has been cited to achieve success in the reduction ofenergy intensityand maintaining reliable energy supply. The ambition of the United Kingdom was ingrained in reducingcarbon dioxide emissionsin the long-term basis.
However, due to the production of North Sea oil, the energy self-sufficiency policy embraced by the United Kingdom is ceasing. Regarding energy transportation policy, the United Kingdom has maintained a historic record of its public transport by use of trainsthat links cities. The policy does not greatly encourage use of hybrid vehicles or those that use ethanol fuel so as to moderate fuel costs.
Ingrained in renewable energy, the energy policy of the United Kingdom is ingrained in boosting wind and tidal energy use.This is affirmed in the Energy White Paper of 2007 target that U.K’s 20% energy has to originate from renewable sources by the end of 2020.
Challenges and Issues facing the World Oil and Gas Industry
Though coal provided 42% of the global electricity in 2015, preliminary data of Global Oil Markets recorded a decline of 2.9% in the same year. Between 2011 and 2014, the capital expenditure increased by 20% while oil prices dropped by 4.2% (US Department of Energy 2015). Ingrained in Daly &Herman (2012) studyto determine if the global production of oil is declining, he established that in 2014 a decline in oil production was recorded in China and some countries like Ukraine where unrest prevailed.
Australian mining industry faces the risk and uncertainty in coal and oil market. Two factors have been attributed to the reduction in the coal investments. China’s development of a legislation of cleaning up the air in its cities is feared to result to the banning of coal. The ban will put pressure on the Australian coal investments that assume a growing Chinese coal market.Secondly,because of the high risk-averse capital markets, majority of the mining and metal companies’ remain focused on short-term and cost-cutting operations that are aimed at maximizing returns to the shareholders.
Table of World Oil Prices 1990-2015
Source: US Department of Energy (2015)
Generally, the world oil prices have increased since 1990. For instance, in 1990 the world cost of oil was $US22.88 per barrel and by 2015, the end of 2015, the cost had risen to $US52.72 per barrel. According to the US Department of Energy (2015), changes in the world oil prices determined by the demand and supply of crude oil in the global market. Weak economic conditions that were realized in the many countries across the globe between 1991 and 1995 led to less demand of the oil and the subsequent push down of world oil prices.
Between 2000 and 2010, an economic recovery largely contributed by peace across the globe led to increased demand of oil. Increase in demand resulted to shortage of oil across the globe thus leading to an increase in prices that were recorded in this period. 2010 recorded the highest world oil price.
Between 2011 and 2014, an increased demand on oil was also recorded but unrest experienced in the oil generating countries of Middle East and North Africa put supply of oil across the globe at risk. The rise in demand and the reduced supply of oilled to the push of prices higher. However, in 2015 downturn in world oil prices was recorded as a result of increased oil supplies, mainly from the United States which led to the outpacing of the increase in global demand thus a reduction in price was recorded.
Unconventional resources entail shale gas and the oil sands (George 2013). Vast studies have concluded that although the resources present a solution for global energy needs; the technology ingrained it production, hydraulic fracturing, has been found to greatly contribute toincreased cases of debates and its further harmful to the water resources and natural conservation approaches. Ingrained in these findings, use of unconventional resources has faced an impediment due tounfavorable legislation from governments.
A summary diagram of challenges
Unfavorable Fiscal Terms
As elucidated by Daly &Herman (2012), the unstable fiscal regime of the Host-Governments has prompted great pressure on oil producing institutions. Further, the unfriendly fiscal terms has resulted to insecurity of the investment policies. Premised on the first meeting held in the UK with regard to oil and gas fiscal forum, it was deemed that oil industry should be subjected to predictable fiscal regimes that are also secure. Statistics further confirmed that there is a £2.4 billion reduction in tax revenues as a result of a fall in the production and the exploration drilling.
Based on the finding of the Deloitte in the 2015 analysis regarding the challenges facing world oil and gas, Brazil faces the challenge of fiscal regimes. It is worth noting that thecurrent global tax policy is greatly impeding the oil and gas industry growth.Further, tax in innovation is proving to be yet another challenge facing the present industry. A practical example is China that enforced crude oil experimental resource tax products having7% on sales.
S.W.O.T Analysison BrexitReferendum on Oil
Exiting from the EU bloc is perceived to making the UK take the responsibility of licensing and regulation oil. This will further enhance the decommissioning of the offshore installations. Besides, the Brexit is viewed as strong ground of the UK enforcing environmental legislation that is applicable in the upstream oil activities.
The success of the Brexit referendum avail a strong scorecard avenue for the UK to control its taxation regime. Particularly, taxation regime applicable to the returns acquired from theoil proceeds.
The success of the Brexit referendum will make large multi-national oil firms thrive in region with trade barriers. The exit demonstrates that free transition between the UK with other EU states will be made more complex.
Additionally, the exit will present a logistical burden for upstream oil organizations that initially benefited fromthe internationally mobile network facilitated by free navigation within the EU bloc.The exit is attributed to the climate of uncertainty creation perceived to emanate from the initial instability environment of investment.
It is further perceived that there is possibilityof the re-emergence Scottish independence prompting stormy times the UK’s oil upstream sector.Ashurst law firm partner, Michael Burns, portends that exit may exacerbate UK’s already challenge of dealing with volatile oil prices.
However, Michael Burnsperceives the Brexit as a ground of enabling the UK government in remaining at the helm of exploiting the offshore oil assets. As elaborated by Airswift’s CEO, Peter Searle, leaving the EU signals a great opportunity of the UK’s North Sea. Particularly, Norway that a critical playerin the U.K oil industry exited EU and time has come for U.K to exit.
Exiting EU bloc presents a threat to the UK that is ingrained in the confusion of the law to apply with regard to oil activities. The question on whether to continue applying the EU laws of oil activity or enacting domestic policies remain a threat to the UK.
The oil sector in the UK is faced with the threat of depletion of the off shore reserve. Further, the exit will subject oil industry intouncertainties emanating from the unconventional oil policies ingrained in the slow renewable energy growth and the electricity supply dependence from theEU members.
Need for Revisiting Policy Framework
Ingrained on dissenting opinions regarding the Brexit and the threats and weaknesses analyzed, there is need to revisit thepolicy framework in order to accommodate the wishes other brits in establishing coexistence with other bloc trading members.
Revisiting the will give room for embracing of comparative advantage. Being an economic concept where a country or a company specializes in the production and exportation of oil that it can efficiently produceat minimalopportunity cost. A comparative advantage enables countries in EU bloc to produce oil where they have the potential and at minimal cost. Further, it helps shape a company or country’s entire focus.
The bilateral relationship of the EU members should be premised on the differences in comparative advantage between the member countries for effective results.Premised on Kennedy& Koehn (2014) assertions, EU’seconomic reforms are based on the comparative advantagehave been the accelerating factor towards the establishment of bilateral ties and expansion of businesses among bloc members. States have recorded increased bilateral trade since 2005 that has come realized a rapid economic growth, thus the need to revisit the policy framework. In addition, the trade liberalization undertaken by the bloc countries fosters cooperation catalyzes bilateral ties.
Against this Framework that is geared to improving the commercial, policy links, anda two-way trading relationship among bloc member states, there is need for the UK to revisit it the policy framework in order to enhance agreementof undertaking a joint feasibility researchof a possible bilateral free trade agreement. The UK’sdepartment of foreign affairs needs to undertake the study that is constituted in a detailed examinationof the possible opportunities and how to overcome the likely challenges that may face EU oil trade business. In March 2005, the feasibility study was concluded and recommended for the removal of barriers to trade through the implementation of the FTA that was to deliver significant economic benefits to membercountries.
It is worth noting that Free Trade Agreementamong EU bloc membersconstitutes ingredients required in the creation a net welfare gain. Countries stand to obtain direct and indirect benefits from the adoptionthe all-inclusive bargain. Based on this background, bilateral trade in the EU bloc will flourish thus the need to revisit the policy framework. In 2015, the value of oil trade increased by 12.8% totalingto A$190.3 billion, or 21.6% of the total trade in the EU bloc (US Department of Energy 2015).
This study was premised on critically examining the framework of the energy policies in the world. Demonstratingcrucial global challenges that face the world oil and gas industry covered the scope of this study. Further, an investigating that was founded in analyzingfactors affecting the long term prospects of world oil was also executed. Notably, elucidating the result of the June 23rd 2016 referendum of leaving the European Union was explored.
In conclusion, the framework of the energy policies established that different states have vast policies governing energy production, itsdistribution and consumption. Price volatility, unconventional resources, and unfavorable Fiscal Termswere found as the present challenges facing the oil and gas industry. Besides, S.W.O.T analysis regarding Brexit Referendum on Oil was done and logical needs for revisiting policy framework were given.
Daly, N&Herman, E. 2012.Steady State Economics: The Economics of Biophysical Equilibrium and Moral Growth. San Francisco: Freeman.
George, H. 2013. Protective or free trading; an examination of the tariff question, with especial regard to the interests of labor. New York: H. George and.
Robert S. & Daniel R. 2011. Microeconomics. New Jersey Prentice-Hall.
US Department of Energy, 2015.WTI Crude Oil Spot Price Cushing. [Online](Updated 4 Jan.