Thursday 30 September 2021

Self Sufficiency Revisited

For it's Tommy this, an' Tommy that, an` Chuck him out, the brute! 
But it's " Saviour of 'is country " when the guns begin to shoot

[In response to a BTL question last week]

Yes, paying for an insurance policy is always annoying when there's not a cloud in the sky: but there's always regrets when the rain sets in.  So now the cry goes up: why do we have so little gas storage?  Why did the government allow the Rough storage facility to close?  Why are we so much worse off than the Europeans?

The answer, ladies and gentlemen, is the usual convoluted story.  Rough (a partly-depleted gas reservoir in the southern North Sea) was cannily sold by its American owners to the old British Gas (when still a monopoly / monopsony) for conversion to a storage facility.  They spent an epic amount of money on it, and were very proud of it when it came on stream.  But there's a very strong case that they never actually needed in those days (1980s), such was the strength and diversity and flexibility and reliability of North Sea gas production straight from the fields.  However, monopolies of that kind are run by engineers, whose solution to every question is "build more stuff", especially when they can just dump the cost on captive customers.  And so they did, gold-plating and all.  How we all laughed.

Two changes of hands later and it's back with Centrica, one of the several linear descendents of the old BG.  Rough is huge, & what we call "seasonal storage", i.e. 180 days to fill it, 180 days to blow it down (rather than smaller fast-cycle: perhaps 30 days to fill and 10 days to blow down).  It found its place in the early years of this century as a perfectly commercial asset, making its way in the very liquid, dynamic gas market that developed in the last half of the 1990s and hasn't (yet) looked back - indeed, it's spread to the whole of Europe.

Where they still, however, do some things a bit differently, most notably in Italy.  Some history: with the exception of the Dutch, they've all been uncomfortably dependent on Russian gas for many decades - enough to make anyone invest in a good bit of storage.  In most countries it is operated more-or-less commercially, with the glaring exception of Italy (also a big importer from, errr, North Africa) where the government mandates in detail the maintenance of extremely costly, and most would say excessive, gas storage inventories, and won't allow the storage facilities to be operated commercially at all.  As insurance policies go, this one is very costly indeed.  The French used to be similar, but not for quite a while now. 

Because ... we now have a thriving and very efficient integrated European gas market, embedded in an increasingly efficient global gas market mediated by shipborne LNG - so folks can choose their supply-security measures from a range of alternatives:  physical storage; virtual storage; call options; flex contracts etc etc.  They all have their pros and cons: I could draw you a nice table in powerpoint®.  So when Rough suffered a couple of explosions and became "too costly to repair" (and after Centrica's pleading for a special subsidy fell on deaf ears) it was allowed to fall idle.  (Though not abandoned, because Centrica dreams of getting a big subsidy to restore it / convert it to CO2 storage / convert it to hydrogen storage / convert it to a theme park / anything, really  ... except shell out for actual, final abandonment.) 

Behind this lay an important factor: the price spreads (seasonal, and general volatility) that drive the value of a storage-option were in the doldrums, and remained that way for the best part of a decade.  Centrica wasn't the only European operator closing storage facilities during that period, by any means.

The decision was perfectly fair, commercially; and not particularly negligent of the government of the day, either.  Because, even now there's little concern we will run out of physical molecules of gas, from a variety of sources: it's just the price that folk don't like.  But hey, markets are like that when there's an Actual Shortage; and more storage in the North Sea would barely be noticed against the global price-spike we are now suffering.

HOWEVER: it's fair to say that at times like these, the whole "efficiency / rely on an effective market" vs "self-sufficiency / don't trust the market" debate gets revisited with a vengeance, and rightly so.  Because There's No Right Answer!  There are some well-tried quant methodologies to deploy, and they illuminate the issue:  but as ever it all hinges on the assumptions.  People who are anyway self-sufficient tend to lord it over the rest and claim their position is the moral high ground.  People who could never remotely be self sufficient (e.g in Belgium, where there is no indigenous gas whatsoever) are, faute de mieux, rather keen believers in open markets.  I once had a very interesting discussion with a Chinese person (a commissar with a commercial delegation) who, on receiving a presentation about cross-border gas and electricity interconnectors in Europe, commented sniffily that it was a very bad thing for a country to be reliant on imports for gas and electricity.  I politely remarked that yes, it was a debating point for several nations, not least those who import almost all of, *ahem*, their oil ....   I digress.

This is indeed a debate we return to periodically here, not least with our good friend Sackerson.   And we've discussed Rough specifically, too.   There have always been fair points on both sides.  Personally, I'm way up the open-market end of the spectrum.  But it's a continuum, and if you can ever identify clearly enough that the risks are increasing (volatility is generally a good metric) then you can justify a higher insurance premium - be that in the form of storage, call options etc etc.  Since it's been going that way since Jan of this year (I first wrote about it here in Feb), you may be sure all the capable players have been doing just that.  And, by the way, there's no obvious reason why volatility should be going away any time soon, and plenty of reasons why it should stay high.


Monday 27 September 2021

New source of tanker drivers: not what you'd guess

So at the weekend I was chatting to Someone Who Knows, & apparently ... the mass lay-off of commercial pilots has resulted in significant numbers of them becoming long-distance truckers.  (a) They have the skills!  (b) they are totally reliable;  (c) they can deal with complex away-from-home schedules.   

And they make decent money trucking.  What's not to like?  Not as if there will be many flying hours for them any time soon.

(Of course, how long they can hack it without hot and cold running stewardesses is another matter.  Yes, I've known some pilots.  Still, some of those cabs have proper beds ...) 


Friday 24 September 2021

Gotta love a petrol crisis

 Last year it was toilet rolls, the flour...

Now the old favourite a good old scare about petrol and, err, boom. There is no petrol. 

Can confirm out of my window a 1 mile queue to the only petrol station with any left around here currently with a very happy franchise owner no doubt. 

These crises are such a good example of the downside of the risk-cost management approach of just in time delivery. Who wants expensive stock when you can rely on 99% delivery of enough product. Only the 1% of the time is rather painful.

As to the Government, nothing can be done. If petrol stations all get emptied, then indeed there is a crisis. Saying there is no crisis just makes it worse as people second guess. The crisis subsides in a few days when the cars are full and the stations can gradually re-stock. 

Perhaps the only lesson for now is that with a shortage of HGV drivers, perhaps there does need to be a hierarchy of need to allocate our resources - food, power, petrol, public transport, ambulances - these could have some priority to available resources, but all too complicated to figure out and implement before the crisis is over. Endure it we will!

Wednesday 22 September 2021

Energy Crisis Rumbles On

This could get interesting.  Thus far, nothing fundamental has happened that should cause deep alarm, and the (UK) government has actually responded quite intelligently.  But there's an obvious risk that nerves are lost and mad policies get enacted in a hurry, which later become hard to unravel (see several of Sunak's little wheezes over Covid).

First of all, what does anyone expect when the whole world (a) is trying to stop using coal (yes, even China and India, though not trying very hard); (b) has installed epic quantities of wind power; and (c) is recovering strongly from the pandemic, including running big schemes for massive infrastructure development?  Oh, and the world's biggest producer (little Volodya, this means you) is willfully holding back supplies for political reasons?  

Commodity price spikes, that's what.

Although every country will have its special circumstances, the basic phenomenon is hitting everyone.  So - the market (and it's only relatively recently that the gas market has become global, thanks to LNG and the gradual cessation of mad oil-linked pricing in the Far East) is functioning correctly!    

One of the first things that will happen is that US shale producers (those still standing, that is) will be dusting off their drilling plans, having experienced an awful 18 months of rock-bottom gas prices.  That'll help.  (Wonder whether Boris will take another look at fracking, too ... but not this side of COP26!)   And not just gas production: the economics of a whole range of energy-related items will change, too: grid-scale batteries - the major beneficiaries of electricity price volatility, which is what we're seeing - are making absolute fortunes right now.  Some will benefit hugely, some will not:  the list is endless.

But what might policy makers stumble into at a time like this?  Actually, Kwasi Kwarteng gave a very good defence of the free market when he spoke over the weekend (as did Boris in his incoherent bumbling fashion): hopefully this means they aren't inclined to intervene in stupid ways.  The principles they've given for NOT bailing out the tiny suppliers (who shouldn't even exist - a real indictment of Ofgem that they ever got supply licences: many of them are outright scammers), but ensuring the smooth functioning of the "supplier of last resort" mechanism, seem prudent enough.  But the need to intervene in the chemicals industry (which I think is fair, given we are in uncharted territory) might result in mission-creep on other fronts.  The special-pleaders are forming a long queue ...    

What else?

Russia:  the Euro-wallahs are pretty angry with Putin's naked ransom-holding over Nord Stream 2.  What will they do?  Germany has an election coming up ...

Europe:  expect plans to shut down coal & lignite plants to be thrown into reverse (but not this side of COP26 ..!)  Even the Graun has noticed that Europe is fundamentally hooked on natural gas, whatever the greens might like to wish for.

Nukes:  EDF will be salivating at the prospect of a large-scale failure of nerve by HMG on a new public finance mechanism for more new nukes.  Rolls Royce won't be far behind with their odd "mini-nukes" plans (they aren't so "mini" at all).

Lefty-greens:  these types never miss an opportunity to set up their demented wails ("if only we had gone over to 100% wind five years ago, none of this would have happened ... oh, wait a minute ...";  "this shows the need for 100% nationalisation and a New Green Deal which involves everything we've ever wished for including Trans Rights, all bundled up together in green string") etc etc.  I think we may safely ignore them, just as Kier Starmer wisely does.

COP26:  The entertaining prospect emerges that November's COP26 might take place against a background of power cuts, if not to the conference hall then to industry.  (Actually I think that's more likely in Feb-March, but we'll see).  In any event, the whole thing has become more problematic for Boris and his longed-for global "king of the world" PR triumph, because even though most countries will politely defer big "retrograde" measures until after November, few of them will nowadays have quite as much stomach for "wind power solves all problems", or "you rich nations can easily afford $100bn p.a. for us developing nations" - in private, anyway. 

There are loads of other potential ramifications but I'll stop there for now.

Will the lights go out?  Regular readers will know I endlessly back National Grid to prevent this.  But this year, the cost of doing so will be very high indeed.  And you know what?  If we get a serious cold spell, they might actually fail this time.


Friday 17 September 2021

AUKUS - welcome news indeed

Back in June I wrote here [OK, Cold War It Is]:

Joe, you and your new posse gotta rescue already-suborned New Zealand, and make Australia feel a lot more comfortable with its situation.  Fast.  Otherwise it'll be clear that your reach is only to those lazy countries that are a comfortable distance away from the coming action in the Far East.   And even they will still be defending their precious Sino-exports and graduate-student fee income, hoping nobody will notice or mind too much.

He was listening!  And now we have AUKUS, replete with new nuclear subs for Oz.  (Gotta love the choice of name: not sure AUSUK would have worked at all ...  At least someone was giving half a thought to the matter.)

A bit of context.  What has recently become common parlance as "the Five-Eyes (intelligence) community" is officially AUSCANUKUS, with the 'Aus' being Australasia.  (You will sometimes find people, e.g. Wiki, inserting an 'NZ' but that's technically spurious.)  Sadly, NZ has been so thoroughly suborned by China, they've effectively self-selected themselves out of the inner circle; and we have to guess Canada had no particular reason to be in on this latest one.  Pity, but there it is.

Now to the reactions.  China very hostile, natch: say no more.  France, hahah!  Crocodile tears all around.  They were screwing up their own Oz-deal, and had it coming.  What are they going to say to us - if you don't back-track, we'll let all those refugees sail across the Channel?  (Oh, wait a minute ...)   In fact, what we'll be saying to them is: pipe down, Johnny Frog, or we'll leave those troops of yours in Central Africa with no helicopter support or aerial reconnaissance.

And everyone else on the world stage?  Well, by Heaven, after the Afghan debacle, something had to be done, or else the Taiwanese and many others besides would have been starting to make their accommodations.  Let's hope there are several other good ideas where this one came from rolling out over the weeks and months - most especially including something significant and soon for New Zealand, please.  As often noted here before: the lines of logistics in politics - particularly in foreign policy - can be very short.  Imagination is everything.

Which brings us to the Labour Party - which rushed to applaud the whole thing!  With a speed that must leave plenty of domestic lefties just reeling.  Even the Graun is more or less onside, even if leaving themselves a bit of equivocal wriggle-room.  (Gad, these people are so easily blindsided!)  We can expect some pushback to this amusingly tame position, I expect, in the run-up to Party Conference.  (Perhaps Starmer's Lotto crowd plans to make it yet another dividing line for advancing their really quite ruthless purge.)

Anyhow: credit where it's due - hats off to Biden this time.  

(I reserve the right to call him senile again if he drops the ball next time, though.)


Thursday 16 September 2021

More power disaster

 UK power prices soar after key cable hit by blaze - BBC News

Oh dear, so the earlier in the week incredible rise to £345 per MwH has been easily surpassed now by another £100 per hour or so.

Oops, and this is long-term, half the interconnector gone until March. Talk about bad luck, CFO's at retail power companies are going to be having a lot of sleepless nights. 

Maybe we should have built that Iceland interconnector after all!


I see Utility Point and Peoples' Energy have both ceased trading today. So much for fixing your domestic pricing....will be last man standing shortly. Maybe Centrica's share price will have a counter-intuitive bounce!

Tuesday 14 September 2021

Time to switch off

 I really mean it too..

Check this story out - a very well written piece in Bloomberg that actually factually summarises all the relevant key points at hand. 

Due to no wind, there is a 10% gap in energy production in the UK this week. France has many of its nukes off-line, so we rely on back up coal and gas. Right at the point where global supply chain issues mean that prices are soaring.

And I mean soaring, one contract on Monday went for £1760, as opposed to the usual £50 per KwH. The average a mere £345 - just a seven-fold price increase for the week. 

Of course, the wind will blow again, but there is no way this episode does not lead to markedly higher consumer prices over the winter. Cold spells in winter now are going to cost the wholesalers even higher prices than this as supplies of gas are so tight. 

As such, time to make sure you turn of unused plugs around the house and look to limit consumption where you can. My rough guess is electricity prices will double over the winter at a minimum from where they are now and stay that way for a while. Worst case will be 3x or 4x the price in January.

Hello, is that inflation I see coming down the road at speed?

Wednesday 8 September 2021

Boris blows it

 Maybe I am a slow learner, I gave the Government a break on Covid. they made some mistakes and more than decisions they got right. But we all make mistakes under pressure (you should see my ever dwindling share portfolio, which I can only make rise in a falling market, sadly the market has been on the up for years).

Brexit too, many of the benefits are just plain ignored by the Remainers in favour of more and more ludicrous stories of empty super markets- the truth as ever is somewhere in between. But the lack of joining EFTA will bug me, as so much of the aggro now we need not have. 

However, the NI tax rise has broken me. Hosing more money on the NHS is insane. The health service is barely fit for purpose and health inflation accelerates away all extra spending. The money taken today won't likely ever really go into social care. 

Social care is a mess, throwing more state backed money at it is a bad idea. It is a mess partly because 90% of the sector is state backed, with all the price gouging, poor service and poor working conditions that usually entails. But Boris wants more of this. 

Boris has lost any kind of ideological compass. This is a Labour policy through and through, so Labour even Ed Milliband would not have tried it. If the Tories want to be Labour, fine, but then we may as well vote for the real thing and be done with it. 

Monday 6 September 2021

Here it comes...

Made a prediction last week, turns out I was a bit on the cautious side, China look to be getting ready for this imminently whilst Old Man Joe gets sipping his horlix. 

Friday 3 September 2021

Paying for care - tax rises incoming with bucket loads more statism

 Well to be honest the dinner was a pretty rubbish affair all round and now we face the bill.

The Covid bill, which is going to entail more and more to be spent on Healthcare as the Country ages and with worse health outcomes. Plus the nurses and doctors who deserve 15% pay rises, them too. 

Having seen the leaks from the Government that they are going to raise National Insurance, one of the most invidious taxes that hits both employees and employers, to pay for Social Care. 

Where is the capitalist and market answer from the Government? Surely the obvious solution is to create a subsidised insurance group, Government owned, that people could pay into and indeed have different level so potential care. This way if Tarquin is very worried about the family home, he could top up the insurance to make sure it did not get sold to pay for care. 

To me, why should the Government take this whopping amount of money to subsidise the middle class to keep their inheritance. It is another rubbish policy choice, rewarding the old (who don't pay NI anyway) and the middle class (who could afford the care). It is not great for high earners as they actually pay the NI and it will mean another drop income for them, when they already pay 37% of all taxes. 

What has happened to the British government over the last two decades, it has totally switched to always seeking more central power and tax raising. The Blair government's spited inheritance continues to affect us to this day. 

Wednesday 1 September 2021

Can China avoid the Taiwan gambit?

 I am back, after sometime away in a country that makes the UK feel very cheap indeed. 

Watching the Afghan disaster from afar, as we all did, I could not help but see the Chinese rush in behind, like the fools they are, thinking that for them it will be different. As different, as it was for the Americans from the Russians, is the predictable outcome. The Chinese have invaded with money at least, rather than weapons, but it will soon be frittered on corruption, just like home for them.

However, as much as the US did need to back out of the Country, the cack-handed way it has been done has created a new post-Vietnam environment. For a good decade or more after Vietnam, the US was very isolationist and not very interested in policing the world. Reagan made do with an arms race against the Ruskies which he won at a canter, but involved no hot war at all. Only a little bit of hanky panky in Iran and Iraq was allowed, to keep the hawks busy.

Now Biden has really shaken the game, by ending it. The US is engaged nowhere in the world, certainly not Africa and won't be going into the Middle East anytime soon, save for some face-saving drone strikes against ISIS when it can find them. 

Meanwhile, in the economic world, the huge shortage of silicon chips continues to drag on the economy and push up prices everywhere. UK car sales have cratered, as there are a lack of vehicles to sell, just as the second hand market has taken off. Computer abusers have not had new gaming or mining chips for nearly 2 years - unheard of. 

Over 50% of the world's production sits in Taiwan. Just off the coast of China, a boat ride away. Taking this over would give a hug short-term boost to China, just taking the factories off line for a few weeks would wreak more havoc on the West to go with the Virus they gave us. 

President Xi must be very tempted by this play. The US has no appetite for hot wars and would be a huge risk trying to defend Taiwan. China, with good planning, could do a Crimea and present it as a fait accomplit, welcomed by a new puppet Government etc. 

China will do this one day, today is an opportune time as the adversary is weak and distracted and led by a senile and unpopular President. It could well be now. There are risks of course, the untested PLA could prove a disaster and the whole escapade resemble more the Bay of Pigs than Crimea, this will weigh in the thoughts of the Politburo who are very conservative, so we shall see in the near future how they fall.