Monday 29 December 2014

Oil Price: Halved. UK Power Cost: Halved

There we go, oil halved in a tad over 6 months, to a 5-year low.  Trouble in Libya?  Pphh!

Tell you something else that has halved:  the supposed value of capacity in the UK electricity market.  Back when the government launched the recent Capacity Market auction for 2018-19 power generation capacity guarantees, they and their expensive advisers 'estimated' that the clearing price would be £39/kW.   Meaning they'd need to offer that amount annually to power plant owners in order to get them to guarantee to be available on demand in that time period, in the desired amount.  Pretty much all the idiot energy market forecasters went along with this - indeed, several 'calculated' it would be even higher.

But the auction, which happened in the week before Xmas, cleared at ... £19.40/kW.  Hah!  There are so many amusing aspects of this, I expect we shall return to it in 2015.

For now, back to the two price-halvings.  Are they related ?  Not by cause-and-effect, that's for sure.  Rather, they are two manifestations of the same phenomenon: economists don't know what the hell they are talking about.   And yet somehow they have salaries and positions of, ahem, power.

To energy consumers everywhere - a Happy New Year !



Sackerson said...

So what's going on, and who's doing it?

Mark Wadsworth said...

These wild price fluctuations do in fact illustrate a very important economic concept - if supply and demand are both price insensitive, then the smallest change in either leads to disproportionately large changes in price. So trying to forecast medium term prices is very difficult, unless you know exactly what will happen to supply and demand (and probably even the Saudis don't know that).

They also illustrate that most people calling themselves 'economists' are no such thing.

They are merely 'journalists who write about economic matters', in the same way as 'journalists who cover football matches' are not footballers.

Anonymous said...

Journalists writing about economics are worse, or, no better than the real thing - economics and soothsaying is sorcery, economics and its study therein is like string theory - in that, how long is a piece of string?

Insider dealing, is he clever thing, rewarding excessive speculation gets us to the 1929 crash and again in 2007-8.

All it is, 'economics' is BS prognostication.

andrew said...

If you ask an economist to make a prediction,
you get what what you deserve.

Hayek (an economist) argued that economic knowledge was inherently fragmentary and dispersed and so no-one could possibly know very much - never mind predict the future.

It isn't just economists:
The reason why bankers rig Libor / FX markets is that it's easier than making money honestly.

If you ask an economist about the past, you might get a sensible answer- in the same way that if you ask a banker what your balance was last week, you will get a useful answer.

Nick Drew said...

a rather broad question, Sackers - care to narrow your field of enquiry?

MW yes, the principle is sound, as an explanatory thesis - see andrew's point - and at the same time, forecasting exact prices is completely fatuous: (many 'professional forecasters' have a poor record even predicting 'up' or 'down')

in human affairs, even good and useful retrospective analysis confers little or no ability to predict: economics is just not the same as physics, despite what so many seem to believe

I never cease to marvel at how apparently intelligent, educated & numerate people (often engineers, in my line of business), when shown a 'well-calibrated model' by an econometrics-wallah, go into a trance and believe every word

Electro-Kevin said...

People who really make money have nous and gut instinct.

Anonymous said...

And will that halving of prices be reflected in our energy bills? Of course (not)!

Sackerson said...

Nick: there's theories floating around about price manipulation for geopolitical reasons; your comments?

Mark Wadsworth said...

Anyway, returning to the topic in hand, I slim read the DECC document and it appears these contracts nearly all run for just one year.

I get confused with kW, MW and GW and kWH, MWH and GWH, but if I multiply up that £19.40 by capacity, I get a payment to power station owners of just under £1 billion for one year.

Correct or miles off?

If correct, that means about £25 per household (assuming they use two-thirds of all electricity) which to be honest seems fair enough if the alternative is power cuts and black outs.

Mark Wadsworth said...

"even good and useful retrospective analysis confers little or no ability to predict"

Well, proper economics does, it predicts that if the Saudis increase supply of oil slightly, prices will fall markedly and vice versa. You can't blame proper economists for not knowing what the Saudis are planning.

Simply sticking a ruler on a price chart and extrapolating is not proper economics.

There are other things where supply and demand are elastic, and the price of these things is much more stable.

So, for example, we can predict that the price of new cars will not change much in the next couple of years (especially if you understand the kinked demand curve, which nobody does).

Nick Drew said...

Mark, (1) your reading of the CM results is correct

Davey and his bunch of DECC sophists claim the cost per household will be less than you calc, not because they cannot do arithmetic but because they claim the 'more secure' capacity obtained through the CM will dampen the wholesale price of electricity on the day

directionally this is right, other things being equal - but putting a number on it is (once again) fatuous

(2) I caution against even your Saudi example. Here's a test question:

Scenario A national market for a particular commodity in year 0 of a 10-year period has the following characteristics

- annual demand = D
- wholesale price = P
- demand met mostly from indigenous production, but more than 10% from imports

over the 10-year period, annual national demand rises steadily to 2xD (and increases in other countries, too)

in the same period, imports fall to zero and the country actually starts to export a bit, to the extent of about 5% of national demand

what happens to the wholesale price?

answers on a postcard

Nick Drew said...

Sackers - if we stick with oil, I'd say (in brief)

- the higher price ($110-120) that prevailed for a year or so before June 2014 was the manipulated one

- the current price is sustainable for years, not just months, unless (until) effective manipulation commences once more

Producers naturally want high prices (not just oil-producing nations and companies, but all the engineering & service industries, too). In the case of oil (with its very high utility value) they have sort-of persuaded a lot of consumer interests that higher-than-necessary prices (a) are affordable; (b) represent a sensible transfer-payment to countries rhat might otherwise get stroppy; and (c) keep a lot of engineers in work

they have allies in the green movement who (i) are temperamentally disposed towards believing in iminent Peak Oil, and (ii) know that only ultra-high hydrocarbon prices can give the slightest economic rationale for their bonkers green plans

Sebastian Weetabix said...

When shown a "well calibrated model" on any subject this engineer's bullshit detectors twitch madly.

I freely concede my intellectual inferiors in the institute are prone to suspension of their critical faculties when shown a shiny computer, but these tend to be the younger ones who like xbox and never learned to use a slide rule, nor did their own programming with C or Pascal.

There is nothing like a collision with reality to destroy a lovely theory. There is something beautiful about a gang of facts murdering a thesis in a dark alley. Globull warming comes to mind. Peak oil and the rent seeking green cunts are all of a piece.

Nick Drew said...

There is something beautiful about a gang of facts murdering a thesis in a dark alley

nicely put, SW

unfortunately, some of these doomed theories stagger around with fatal wounds for far too long, like Rasputin after several gunshots and a lethal dose of poison

BE said...

"answers on a postcard"

Well it's obvious, innit. The commodity price either goes up or down, or stays roughly the same.

I have always assumed that as/if Peak Oil really does approach we will quickly develop something better. Just look how quickly cars have improved in efficiency over the last 10-15 years. It's quite incredible.

Budgie said...

My petrol price is down by 20%, but my electricity bill is down not a penny. The scheme is to promote capacity availability and new build, it is not a halving in the retail price of electricity or anything like it. Indeed the "scheme [is] expected to add £11 to consumer bills ..." (your link). Oil and gas (and coal) are primarily consumables for electricity generation, yet a 20% price drop for electricity users seems just a dream, still less a halving. Not such a happy New Year then.

Nick Drew said...

that's why I said 'power cost', not 'electricity price', Budgie

(I am sure you know the difference betweeen power and energy)

Mark Wadsworth said...

"what happens to the wholesale price?"

1. Not enough info, what happens to total global output?

2. As I was saying, what happens to clearing price depends on price sensitivity of supply and demand.

3. Oil is an extreme case, because both supply and demand are fairly price insensitive.

4. If we consider computer chips to be a commodity, both supply and demand are very price sensitive, so prices won't change much (have been observed to go down quite markedly)

Budgie said...

ND, that's why I made the point about electricity retail prices, making it clear that was what I was commenting about. In a free market for electricity its retail price should have gone down, given the oil price halving. But currently such a free market for electricity does not exist, as I have noted in my previous comments.

Let us hope that the pressure of reality will have some effect on the government, but I suspect that supertanker will not be turned quickly enough, wedded as it is to the green blob.

I am unclear why you made the comment "I am sure you know the difference betweeen power and energy", or what you mean by it? If physics, the two are connected by time; if people, the definitions are in the dictionary. Perhaps you actually meant to say "generation capacity" and "generation output"? If so you can see I do.

Nick Drew said...

MW - in the example, total global output (and of course demand, it has to go somewhere) rises somewhat over the 10 years, but nothing like the doubling of demand that takes place in the national market in question

additionally, when the substantial and steady increase in demand commences around year zero (in the national market), it is definitely a demand-pull situation, driven by a whole new source of demand being developed (via new technology)

Mark Wadsworth said...

ND, I suspect that you are referring to a real life example. but "commodity" is very vague. Is it something of which there is a fixed supply in the ground (oil, steel), or is it something which is manufactured (computer chips) or which can be produced more efficiently/abundantly with technological progress (i.e. better fertilisers)?

As you don't say, I will have to guess that the price goes down; if a country can double its output over ten years, it probably falls into one of the two latter categories.

Nick Drew said...

yes, real-life: and yes, you are right, the price went down

however, it was 'fixed supply in the ground' category (though of course technology always plays a role)

and most people (economists!) guess 'up', particularly if you pose the question as "what would you have said in year zero if you reckon demand is going to double and imports fall to zero" (rather than how I asked it, which told you the doubling was achieved successfully and locally)

it was natural gas in the UK, 1990-1999, and the (wholesale) price halved

the increase in demand was for power power generation (had been zero); the imports were Norwegian (they started again a decade ago, but went to zero for a while); the exports were (are) to Ireland

that's halved

no economist saw that coming, and it ought to give plenty of people pause

BE said...

"real-life... no economist saw that coming"