A friend wrote me a nice email saying “only the UK is capable of getting out of Europe twice in one week”.

He was referring to England’s exit from the Euro Cup and linking it to the Brexit vote a few days earlier as if the English team wanted to confirm the vote in the referendum. The news of the Brexit result caused immediate havoc on world markets as shares, oil prices and the sterling exchange rate fell simultaneously, but some more than others.

Brent crude oil price fell from almost $51.50 (Dh189) a barrel on the eve of the referendum to almost $47.5 a barrel a couple of days later. However, it recovered partially and is moving like a yo-yo at around $49-$50 now.

The market is described as being very volatile. Rightly so as the extent of the Brexit impact is not yet fully understood.

By itself the UK leaving the European Union is unlikely to cause a lasting impact on oil. The UK demand in 2016 is estimated at 1.66 million barrels a day (mbd), which is only 1.7 per cent of global demand. Its oil production is 0.98-mbd, which is even less in relative terms at 1 per cent. Therefore, pressure on oil prices would be driven by probable risks to the economy rather than by fundamentals.

Therefore, the immediate decline in oil prices was a knee-jerk reaction to the gravity of the vote and the fear that it may have a bigger impact on the European Union and the world economy at large. The UK itself might suffer higher import prices as European oil and gas sellers may impose tariffs.

Concessions

All this would depend on the final negotiations and whether the EU would extend any concessions to the UK, which does not seem likely given the current mood. The suggestion in the Wall Street Journal that the UK “can just as easily buy LNG from the US or elsewhere if any proposed tariffs prove to be too high” is counterproductive as the UK would lose its investment in existing and well-established pipeline linkages with European countries and incur new investment in additional LNG terminals.

The contentious shale gas development in the UK is too far away to be considered for now.

The area where the UK energy sector is likely to suffer more is related to uncertainties on North Sea investments, as companies may pause until the full extent of Brexit is known. Smaller companies may face difficulties raising capital especially as the level of oil prices is not supporting either.

The dollar appreciation against the pound will make UK imports more expensive and this would be reflected on consumers in higher prices on oil products, gas and electricity. The exchange rate before the vote was $1.52 to the pound, and fell to almost $1.32 before rising to around $1.37.

Risk

Official statements said during the Brexit campaign that the UK “energy trilemma” of secure supply, less carbon emissions and affordable energy prices look at risk now after the vote.

Security of supply would now depend on relations and agreements with the EU, which are not expected to be as good as they were before the exit. Low carbon energy development is expected to suffer by the reluctance of investors until things become clearer. Consumer prices are likely to increase, either by EU tariffs or alternative supplies.

Even after the vote, UK energy minister Andrea Leadsom said that investors will still be interested in the UK market for renewable energy, though Siemens said it plans to freeze new investment in the country’s wind sector for the time being.

The views of the major energy companies are reflected in Shell saying that it would continue working with the relative institutions though it favoured the UK to remain in the EU.

A Rigzone blog on June 24 suggested that “leaving the EU could ultimately signal a more prosperous future for the UK North Sea. Norway, a key player in the energy industry, already exists successfully outside of the EU and now it’s the UK’s time to carve out its own future.”

Cherry-picking

Very upbeat but unlikely to be the case. Norway decided from day one not to become a member but implemented all EU directives and sought all kinds of cooperation with the EU unlike the UK, which after cherry-picking inside the EU for over 40 years now decides to leave.

At the moment, there is fading concern over the Brexit vote except in the UK where a large portion of the population are shocked at the result. Politicians are haggling and not giving guidance as to how things would be handled.

Scotland and the city of London are considering independence and Northern Ireland wants a vote to join the Republic.

The Brexit might not happen after all.

 

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.