Thursday, 22 January 2009

Gas Prices: the Dog Didn't Bark, the Slide Commences

The British Gas announcement of a 10% retail price reduction, welcome as it may be, is small beer. For 2009 we predicted a major decline in European wholesale gas prices, with big knock-on effects in the market.

It’s moving our way. Consider the graph of UK spot gas price, and recall that this is the period during which Russia turned off the taps. Responding as only a free market can, British suppliers commenced exporting into Europe – yes, even in mid-winter – and still UK prices barely moved. (In earlier situations of shortfall, UK spot prices have been known to spike to over 200 p/th.)

This speaks to a very comfortable supply situation: in fact, an over-supply, which will cause prices to slide significantly as we move out of winter. It also speaks to the superiority of open markets as a means of responding to problems, however large.

Both of these lessons point to big changes ahead. Russia must face up to a huge dent in its export revenues. European oligopolies are hooked on commitments to buy minimum quantities which, even at falling prices, look pretty sick against recession-battered industrial demand. Notwithstanding their strong hostility to spot markets they will perforce be dumping surplus supplies into the market and thereby adding greatly to liquidity. This will strengthen market mechanisms and competition - and weaken Russia’s position still further.

Recession, eh ? It’s an ill wind …



Unsworth said...

All true. Nonetheless we should do our best to ensure that we're not held to ransom over any raw materials, or foodstuffs, ever. If that means stockpiling or multi-sourcing then so be it.

Not that that's likely, but I'm concerned that volatility (political) in other parts of the world remains a major threat.

Old BE said...

I like the idea of countries buying more gas than they need and then having to offload it (to us) at a loss. Kind of makes right the previous situation where the cartels in Europe forced us to buy emergency supplies at bizarre prices.

Nick Drew said...

Unsworth - I agree, but neither gas nor oil are in short supply, and the best way of not being held to ransom is if all buyers / importers ensure there is a free market, so whatever oil is available goes to wherever the need is greatest, as signalled by price.

This is how the West overcame the OPEC oil embargo of 1973-74: no-one has ever been held to ransom over oil since then (bar a couple of very minor local issues in the Baltic states); and it's how we should sort the Russian gas issue. Russian gas only represents 6.5% of EU primary energy !

So - stockpiling up to a point, but even better is to multi-source, as you put it, or in the words of Churchill:

Safety and certainty in oil lie in variety and variety alone

BE - yup, sometimes virtue is indeed its own reward !

Mark Wadsworth said...

Thanks for promoting me to your 'seen elsewhere' section.

Lola said...

Putin (when told of this) said: "Buck, the markets!"

(At least I think that's what he said)

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