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 …