As we enter yet another episode of worried or sanctimonious articles about the gas conflict between Russia and Ukraine, it's worth remembering a few simple facts:

1) The conflict started in 1992, not in 2006;

2) Russia cannot win a gas war against Ukraine and knows it;

3) the real underlying stakes are not about Russia or Ukraine.

To steal a phrase “It is the best of times, it is the worst of times,” although the rest of the opening to A Tale of Two Cities (“It was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair,”) may also be appropriate. It is also interesting, and will become more so as the new Administration seeks to find a way forward out of the compounding problems that now face it. The WSJ has noted the statements by President-elect Obama earlier:

On the campaign trail, Mr. Obama argued that spending $150 billion over the next decade to boost energy efficiency would help create five million jobs. The jobs would include insulation installers, to make houses more energy-efficient, wind-turbine builders, to displace coal-fired electricity, and construction workers, to build greener buildings and upgrade the electrical grid.

It goes on to note that if renewable energy is only brought on-line to displace conventional coal power, then the net job losses from existing industries may well offset the gains in wind power. That topic brought a discussion in comments a couple of days ago. It is, however, perhaps worth pursuing in a little more detail.

One of the considerable differences between the ongoing financial problems of the world, and the coming energy crisis lies in the nature of the commodity of concern. In the first case the problem focuses around money, though not really the physical and tangible cash that one uses less and less to pay for groceries, the rent, or the occasional book. The US has already transitioned to a point that more than half the time we use credit and debit cards to pay the bill. (The quote is from a year ago)

As debit card and credit card purchases become increasingly popular, check and cash payments continue to lose out. These traditional payment methods now account for less than half of all transactions, and a recent rule change by the Federal Reserve Board should tilt the balance even further away from paper transactions and toward plastic payments.

As a result, for the vast majority of us who do not keep our money in the mattress, financial solvency and insolvency is defined by electronic statements about the nature of our accounts, without there being a pile of gold sitting in the bank to define it. And, when the banks and other companies holding such accounts get into trouble, loans can and have been arranged for them, that are similarly electronic transactions, without large trucks pulling up at either Fort Knox, where 147.3 million ounces currently sit, or to the Federal Reserve Bank in New York, that holds about 216 million ounces. Rather the transactions occur electronically, and there is relatively little need for the physical presence of the cash.

Contrast that with the realities of an energy crisis. We cannot heat our homes with the promises of oil, or the electronic transfer of ownership of fragments of a tanker load making its way from Ras Tanura to the Gulf ports. We need the physical presence of the oil, natural gas or wood that we will consume. When we run out, we need to get some more.

In recent years, natural gas consumption in the United Kingdom has grown rapidly. At the same time, there has been an abrupt change in UK natural gas supplies, brought about by depletion and decline. In the first part of this two part series, I look at historical developments in EU and UK natural gas consumption, production and imports and the challenges posed by declining production.

In the second part of the series, I use a simulation approach to test the likely adequacy of natural gas supplies during the upcoming heating season. In these simulations, I use data from the UK Department of Business, Enterprise, and Regulatory Reform (BERR), UK National Grid, as well as information about recent UK Continental Shelf (UKCS) and Norwegian Continental Shelf (NCS) develpments. Based on what I refer to as the reference scenario, it seems likely that the UK will increasingly have to rely on Liquefied Natural Gas (LNG) imports to secure adequate supplies.