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Mark Sinclair's Blog: 4 November 2009 - Ikea cars running on Google electricity?

Date: 04 November 2009

Mark Sinclair is boss of leasing firm Alphabet

Ikea and Google are reportedly considering investing in Britain's offshore wind industry. But what does that have to do with the price of fish?

Or petrol?

It is the fact that these multinational giants are not investing in, say, Brazil's offshore oil industry that has huge implications for the future of fleets.

On the face of it, Britain is an odd choice. Our wind power industry is scarcely the stuff of investors' dreams. What with muddled Government policy, on-again, off-again projects and the closure of the country's only turbine blade factory a few months ago, it sometimes seems to be running out of puff.

In contrast, Brazil is confident that its recently discovered Tupi oilfield is going to be a whopper - albeit a whopper situated far out in the Atlantic Ocean beneath three kilometres of water and many thousands of feet of solid rock and salt.

And therein, lies a clue to Ikea's thinking. All is not what it seems in the oil patch. Worldwide oil discoveries peaked in the 1960s and, since then, both exploration and production have been forced to wade offshore, firstly, into shallows such as the North Sea and the West African coast and lately still deeper into the ocean depths.

Oil, which costs as little as $5 a barrel to get out of the ground in Saudi Arabia, may cost upwards of $60 a barrel to produce from existing offshore wells. It will be even more costly to produce out on the new production frontiers, in places like the open Atlantic, northern Greenland and the storm-lashed seas around the Falkland Islands.

Moreover, wells in these locations will never approach the flow rates sustained by the 'gushers' tapped by oilmen in the Middle East and Texas many years ago. In fact many informed observers expect the world's overall supply of oil (i.e. all forms of oil, including tar sand, and their associated gas liquids and condensates) to begin to decline inexorably from 2020 at the very latest.

Britain could hit trouble sooner than that, for a variety of geological and economic reasons. We're behind other European countries in alternative energy provision because we relied too heavily and for too long on North Sea oil, which is itself now in terminal decline. North Sea gas is also now insufficient for domestic needs, while the scant remains of our coal reserves cannot be extracted quickly or cost-effectively.

Britain's economic health has also been affected by successive Governments' over-emphasis on developing the FIRE (finance, investment and real estate) sector rather than manufacturing. Together with the still-ticking time bomb of the global toxic derivatives problem, the fallout from this policy means that UK Plc is not particularly well-placed to withstand large rises in the costs of essential imports, such as oil and gas, in years to come.

In these circumstances, the idea of turning Britain into a low carbon economy isn't a virtue, it is an absolute necessity. The scientific advice being given to the Department of Energy and Climate Change is unequivocal: businesses and people in the UK are going to have to use a lot less energy.

Of itself, this will put pressure on the economy (which, at the most fundamental level, is really only a manifestation of energy use). What we will actually see, of course, is higher prices for most things, especially energy itself. As less total energy is used up in the economy, traditional investment returns will perform less well but new opportunities will emerge.

Google may well go into the electric car business. At the rate its going, that may be the only business it isn't in in a few years' time! Google's immediate concern is more likely to its need for hugely power-hungry server farms. Google buying into wind energy is a good example of a major corporate looking ahead and trying to hedge against future cost increases

Fleets, too, need to be aware of the potential for a permanent step change in energy costs in the next few years.

One of the keys to successful fleet strategy will be thinking volumetrically, not numerically. A fleet's success in the next five or ten years will have everything to do with the size of its carbon footprint and much less to do with the number of vehicles it runs (for various reasons, companies may actually want to own more, rather than fewer, vehicles in future).

Fuel already accounts for one third of fleet costs. This proportion will undoubtedly rise along with the price of oil. Fuel volume, of course, is directly related to CO2 emissions. That is why businesses that want to be ahead of the game in the new economy are already putting the right controls around fuel usage, driver behaviour and fuel reimbursement.

Quite apart from the strategic necessity of tackling fuel management ahead of potential energy cost challenges, businesses that have not yet begun to take these steps are missing the biggest and easiest-to-access area of cost savings available to them right now.

This is a key point for fleet operators. Carbon-cutting moves, such as controlling fuel more tightly or switching to Whole Life Cost choice lists, are not risky investments with an indeterminate payback. They cost little and save the business a lot, right from the start.

CO2 already heavily influences fleet operating costs through the tax net: fuel duty, VAT on fuel duty, corporation tax, NIC and benefit-in-kind. This makes Whole Life Costs the only sensible method of choosing the right cars, with potential cost savings that far outweigh what can be achieved by shaving a pound or two from each car's monthly rental.

While rate negotiations certainly aren't going to disappear, the time to play the rate card is after you've put the right WLC and fuel strategies in place for your fleet.

But don't wait until you see someone screwing together an Ikea windmill or driving an electric Googlemobile before you sit down to implement a sensible fleet and fuel strategy. If you're planning for your business to be a big (or even same-sized) fish in the radically-different pond that will be the commercial environment in a low-carbon Britain, the time to act is now.