Self-sufficiency steel? Ore? Coal, oil ... gas storage ..?

The old debate we often return to, has surfaced again a propos of steel manufacturing.  To what extent is self-sufficiency in strategic commodities and capabilities to be maintained?  Procured?  Or even desired?  Some have strong inclinations to one extreme or the other, whatever the prevailing circumstances.  I tend to say that there's no immutable answer, no formulaic way of "optimising".  War and peace are critical input variables: but also the key given fixed externalities.  China has no oil, as I once diplomatically reminded a Chinese commissar who had just scorned Europe's enthusiasm for electricity interconnection and stated that a nation should not rely on imports of such a vital resource.

In the here and now, I and many others would put primary steel manufacturing on the strategic side of the line.  Clearly, Starmer has taken the same view at Scunthorpe (though curiously unmoved by Port Talbot, as the Welsh Nats bitterly remind him and indeed by Grangemouth / SNP), leading others to note that those vital "raw materials" we were all on the edge of our seats waiting for ten days ago, came from, errr, elsewhere (abroad).

Then comes Nils Pratley, extending the debate to gas storage and specifically, Centrica's huge offshore Rough storage facility.  Pratley is usually quite sound, and here he sets out a reasonably balanced range of pros and cons.

Steel was a security risk. What about UK gas storage? The government refused to allow steel furnaces to be turned off. Should it be happy with just six days of stored gas?

So here we go again.  

Nobody could disagree that now and for many years to come, gas ticks the 'strategic necessity' box.  Since we ceased to be self-sufficient in natural gas in terms of production from our own territorial waters (the early 00's), without any government intervention or subsidy the miracles of the free market secured a healthily diverse range of import sources and facilities through which to convey them.  How so?  We've told this story before.  

Because the decline of indigenous production could be, and was, seen coming a mile off, demand remained strong, and the companies involved were themselves strong, capable and confident. And that's where we are: able (as the energy crisis of 2021-3 showed) to withstand remarkable buffeting from the global market, and still keep homes warm.  For sure, the cost of doing so [i.e. paying world prices] was to some extent socialised, but the means of doing so were free-market means.  

And all this happened without Rough, which had been "permanently shut down" (© Centrica 2017 et seq) some years before as being uneconomic to its owners, the Tory government having more than once declined to bail them out.  But lo!  Miraculously, it transpired Rough had not been permanently shut down, but merely mothballed, and was rapidly pressed back into service by Centrica to avail itself of the profitable opportunities presented by Putin's gas crisis.

See, here's the problem in this very particular case: Centrica has form as a would-be subsidy-farmer.  That's the trouble with going down the "strategic" road.  Just like "green" or any other government-favoured enthusiasm, once the subsidies are spotted, every man-jack starts greenwashing / strategy-washing or whatever.  It becomes very hard to disentangle what could be a respectable strategic case from their self-interested special-pleadings.  

Even in 2025, with that recent crisis experience in hand, for all the ticks that natural gas puts in the 'strategic necessity' box, I'm not sure Centrica should be indulged.

ND 

COP27: Contradictions Foretold

The other day I was looking back at the C@W "predictions 2022" compo.  En passant, it seems that back in January, none of us could believe Putin would actually invade ...

Anyhow, I offered "it's not a prediction, it's a cert; 2022 will be a year when the contradictions in energy policy will truly make themselves felt" - and now, as then, I claim no credit because it was already obvious for all to see.  You could argue - certainly in the case of Germany - it had been obvious for years.

Anyhow, fast-forward to COP27, and much blathering about the wicked oil and gas producers limbering up to produce ... more gas!  And - shock, horror - 

The push is coming from the host Egypt and its gas-producing allies amid a global energy crisis compounded by Russia’s invasion of Ukraine.

Well yes.   And of course benighted Germany is well to the fore in stimulating the producers' revived development activity.  As the Grauniad callously puts it: 

Panic over keeping people warm in winters to come, and keeping the lights on from gas-fired power generation, has led governments in Europe that previously relied on gas from Russia to push for new supplies from a range of other sources.

Well, errr, yes again!  'Panic', of course, is a loaded term in progressive circles, generally coupled as "moral panic", which is always a thing to be derided.  That really is a nasty little insinuation.

Yup, gas it is.  Nature's most all-round effective off-the-shelf fuel offering, certainly in the context of today's technology - while we patiently await practicable nuclear fusion, and/or serious electricity storage capability.  What wailing and gnashing of teeth there will be if Egypt engineers a COP27 resolution which labels gas as "sustainable" ...

ND

Mr P's bold gamble -but what is it?

Very expensive business keeping 100,000 troops on station and ready to go. Let alone prepare an area with bridging equipment, tanks and all the logistical supplies needed for a war. Sooner or late the treasury will start weeping at these costs and the men will want to go home to see their families. 

Mr Putin has been playing this game for months though, Troops positioned to both expand Crimea to attach to a Greater Russia and conquer the Donbass region with its big cities and heavy industry. More worryingly, the maskirovka is in full swing  - stories of the CIA prepping chemical weapons in Ukraine for example. 

The price would be high though, Ukraine will fight on home territory, they don't much like the Russians and the russian troops - who knows how they will do, many are just conscripts. Russian equipment is both good on paper and poor in performance. 

But the West will not defend Ukraine. Some sanctions yes, severe ones even, but Germany still need Russia's gas. Mr P is currently turning this on an off in a display of his power. How Merkel, so lauded like Obama, has left a gaping strategic wound. 

Can Europe survive without Russian gas? In the short term, no, not without power cuts which will visit the UK too. In the long term yes. Plenty in the tank of Uncle Sam that can be shipped (at a price!) to Europe in a war-footing scenario. Equally though, the yanks might let Europe squirm a bit, having told Germany not to do this for decades, they will be very keen on an 'I told you so' moment. 

For Mr P, the upside is an odd one. yes an expanded Russia but international oblivion for 20 years. Long-term, less dependency on her gas which is the only valuable product they have. Maybe he plans to sell it all to China, who are less concerned about CO2 emissions anyway. 

Maybe it is all an elaborate ruse to get Ukraine to say it will never sign up to Nato and to get Nord-Stream2 approved which will in turn impoverish Ukraine suitably. 

But the troops are there now, the stand-off has a time limit. 

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.

ND

How Long the Dollar as World Currency?

BTL in a recent post, Anon asked for views on how much of the present ME unpleasantness is explained by US desire to maintain the dollar as the currency in which the world buys oil?   Anon went on to mention that Gaddafi head been mooting a barter scheme to circumvent dealing in dollars before his demise.

This is quite a long post so I'll summarise here: not really plausible, IMHO. 

It's not an academic response, nor does it contain any quantified macro-economics (my being in neither profession): but after a career in pragmatic multinational micro-economics - the energy business - I do have a number of practical observations.

*   *   *   *   *   *

1.  Liquidity / critical mass is vital in every sector.  Nothing stymies business worse than non-fungibility and non-convertability.   Needless to say, if anything that has "currency" today is doing a halfway satisfactory job in the market, that militates strongly against the adoption of anything else.  The intertia / barriers to entry & exit are great.

2.  There have long been plenty of national-pride-based attempts to drag the commercial world away from Anglo-US dominance of the instruments of liquidity.  In my own sphere: many countries hate having their oil priced against Brent (which almost all crude oil is, except US production), let alone in dollars; and there have been attempts to establish marker-prices for other blends, and to have them traded in other financial centres.  Kuwait Blend; Urals Blend, Dubai ... they come along, they get reduced to a basis-differential against Brent, and the world carries on.  And this despite apparently formidable technical difficulties in maintaining "Brent" as a marker (due to terminally declining North Sea production).  But the clever chaps in London cunningly keep extending the definition of the blend and - thus far - they've had total success.

Likewise, and to Anon's question, lots of folks have dreamed of having oil - even just their own local production grades - priced in their own currencies.  You might justly argue that provided there is full FX convertability between those currencies and USD, what's to stop them?  Answer: nothing - except it would be entirely empty.  The whole business world speaks English (and reads the FT), not Russian or Mandarin.  Arbitrage ensures "their" price would always be (Brent USD +/- basis)*FX.

As regards barter schemes ... well, money was invented, partly because there are distinct, nay fatal limitations as to what barter can achieve.  So I don't think Gaddafi represented any kind of threat to dollar oil trade.   BTW, the Russians have tried to sell gas to China in complex packages with industrial equipment - but the Chinese are having none of it!  Cash on the nail, so far as they are concerned.

3.  Some things do change & evolve: but typically only for very good reasons (which do not include national pride).  Example: the first natural gas trading hub in Europe was the UK's "NBP", and European gas prices for many years were given as NBP (+/- basis).  How logical was this, when the UK isn't remotely the centre of gravity of European gas movements, and the Eu deals mostly in EUR?  Very logical indeed - when only the UK's gas market was truly liquid.  However, over time, unsurprisingly several other hubs emerged as the rest of the EU belatedly caught up on gas trading (well, sort-of), one of which - the Dutch TTF -  was very much closer to the continental centre of gravity than our peripheral island market.  A German hub would have been just as likely a candidate: but the Germans genuinely don't understand how markets work, and screwed up their market design.  The Dutch are much better at it: and so today the TTF is more usually given as reference point for "the gas price in Europe".  (By the way, NBP and TTF trade at incredibly high correlations and the basis differential is always easily rationalised - as you'd expect, because they are both liquid, and generally inter-connected physically.)

4.  So: given that things can change over time and with good fundamental reasons, who's to rule out everything coming under Chinese hegemony in the long run, when their economy becomes dominant?  Well, in the very long run, maybe.  But right now they don't really understand markets either, nor indeed quite How The World Works.  Case in point: they'd spent years cultivating Gaddafi (for his oil), and were gobsmacked when "the West" just did away with him one day.   WTF?, you could hear them saying.   And, to their disgust, right now large & mainstream Chinese firms are obliged to, errrr, kowtow to US sanctions on Iran, much as they'd like to exploit the situation commercially. 

Of course, they hate this stuff and have every intention of supplanting it.  One day.  And who knows, maybe Trump will so overplay his hand, he'll help them accelerate the process.

Then again, the French have long hated the use of the English language everywhere - and most specifically in the organs and councils of the EU.  Tough titty, mes braves; not even Brexit is going to change that. 

No lengthy post is complete without an army anecdote.  All army vehicles come with a comprehensive toolkit.  But as I quickly discovered when becoming responsible for a troop of 30 vehicles, there's only one item out of a dozen or so that's ever taken out of the box, and which is permanently going missing - the Spanner Adjustable.  

Yes: some things turn out to be Really Useful.  The English language, the Brent oil contract, and the Almighty USD are excellent examples.  The clever Chinese will need to come up with something even better if they want any of them to be superceded.

ND

Weekend Read: Defining "Solidarity" in Law

How do you define a fuzzy, abstract concept into law?

Some while ago I wrote about the European "Energy Union", a classic piece of acquis-grabbing-by-stealth from the EC.  There were follow-ups here, here and here.  For what it is worth, the Energy Union was one of the straws that broke this particular camel's back as regards Brexit.

Anyhow, while it may be of diminishing future significance for the UK, something moderately interesting has come of all this.  Because it is now compulsory for EU nations to render "solidarity" to each other in times of dire shortage of natural gas - I think we know where this finger is pointing ... yes, you over there in the East! - and because actually it's just a warm word (for all the euro-wallahs bandy it around like a comfort blanket), the EC is trying to define what "solidarity" might mean in law.

And very necessary, too! - if you insist on this type of prescriptive Civil-Code stuff.   Although these rules aren't yet in force (so the UK made no call on solidarity back at the cold end of February, relying instead on the market) we recall that gas didn't flow our way as one would ordinarily expect when quite exceptional prices were on offer.  Yes, those Good Europeans are - of course - self-interested bastards who need to be dragged by lawyers and regulators to carry through on their hallowed *principles*.

I realise this EC doument's earnest word-smithery may be of limited interest to many readers but personally, though not a lawyer, I enjoy such sub-philosophical endeavours.  It's all in the small print.  And below are some of the things we find amongst this new euro-babble:

• You'll have to pay "fairly and promptly" for any "solidarity" (i.e. gas!) received;
• The "fair" price is assumed to be "not lower than market price (+ costs)", for fear of "perverse incentives" (see, they have been listening to 20 years of the UK telling them what can go wrong with interventionist energy policies);
• All market mechanisms need to have been deployed first (ditto); 
• Solidarity doesn't give one state any authority over another; 
• All subject to Fundamental Rights (which I take to be a get-out clause).

What might this remind you of - if you were German?

I have a feeling certain eastern euro-nations might have been hoping for something a bit less mercenary than this.  And, needless to say, if the market mechanisms are working properly, none of it should really be required at all.

Unless, that is, Russia cuts up really rough.  In which case, (a) frankly, all bets are off.

But ...  (b) those of us *ahem* old enough to remember the 1973-74 oil crisis will recall OPEC cutting up really rough.  On that occasion a rather effective ad hoc intervention swung into place.  The forerunner of the IEA was told by the OECD to sort it out and, adroitly commandeering a powerful linear programming tool sitting in Exxon's HQ in New Jersey, this team allocated the whole Free World's available stock of crude oil based on whatever principles it deemed appropriate.  Oil was tight, but it all sort-of worked.   

See, even avowed free-marketeers can allow for state / super-state interventions when the chips are down ... preferably by people who are competent - which, as well as technical capabilities, includes having market instincts that are strong!  

By now you'll have decided whether the EC document is of interest to you ...  A pleasant weekend to all, whatever you're reading.

ND

From One Euro-Explosion to Another

Distracting as the Parliamentary antics may be, in the outside world something rather tangible took place this week:  a major (and fatal) gas explosion at Baumgarten, one of the biggest hubs in Europe sitting astride a very large quantity of Russian gas-flow into southern and eastern Europe, notably Italy.

Early headlines were dramatic:  "Italy declares state of emergency" and indeed "Gas shortage PANIC".  Fair enough: no-one wants to be without gas in a cold December.  Gas prices blipped upwards, unsurprisingly, and Europe wondered briefly if we were all going to freeze.

But only briefly.  European gas networks are far more interconnnected today than even five years ago and, importantly, market mechanisms have replaced the old system of government diktat that used to prevail over gas supply in countries like France and Italy until quite recently.  When it comes to efficient allocation of scarce resources the combination of interconnection plus responsive market pricing is every bit as potent in practice as free-market theory would suggest.  (That Europe now relies on this approach is, incidentally, a major triumph for the UK over years of patient work in the EC ...)  That Baumgarten has already dropped from the headlines is even more of an achievement when you know there are several other logistical problems in the wider European gas system right now - and a cold snap to boot.

It's also being reported that Baumgarten has already put many of the pieces back together again.  Not wishing to downplay the fatality (nor the impressive photos of cars whose bumpers have melted), but natural gas fires are generally among the least problematic because (a) in this post-Piper-Alpha world, gas units have non-return valves everywhere, cutting off the supply of fuel to the fire very quickly; and (b) methane is so light, the short-lived fireball goes straight up into the air.  Steel doesn't melt quite so easily. 

Hereabouts we used to debate with our old friend Sackerson the thorny issue of self-sufficiency vs reliance on markets.  At one end of a spectrum it can sometimes feel pretty uncomfortable being dependent on a simple price signal to redirect international supplies your way when you're in trouble locally.  At the other end, we know where 100% self-sufficiency leads: grotesque inefficiency - because 100% is never enough, is it?  The monopolists always demand they be allowed to go for 200% or more - just to be sure.  'Security of supply': the last refuge of the statist scoundrel.

What's the optimum?  You don't always have a choice.  Belgium, for example, has no indigenous gas resources, but they want to stay warm, like the rest of us.  So they are 100% reliant on imports, plus a bit of local gas storage. We couldn't all do that: but the power of free trade, suitably regulated (e.g. to stop the French government intervening in situations like Baumgarten and blocking all exports, as used to be their wont), is not to be underestimated.  They'll be OK in Italy, too.

ND

Hitler. Chemical weapons and the outrage bus.

Hitler never gave the order to use battlefield gas.


The WMD was plentiful among the warring nations of 1940s Europe. It had been used extensively by all sides during the 1914-18 conflict. And although chemical smoke weapons, that has a gassing effect, were actively used by the troops in WW2 battles, the sanctioning of chlorine, mustard and nerve gases was never given.

This, as should be clear to even a semi-informed student, is what the rather baffling statement Sean Spicer made regarding the Nazis and chemical weapons, was referring too. 

“We didn't use chemical weapons in World War Two, you know, you had a, someone as despicable as Hitler, who didn't even sink to the, to using chemical weapons.
“So you have to, if you're Russia, ask yourself is this a country that, and a regime, that you want to align yourself with.”

Has he forgotten the death camps that killed their inmates by the millions with deadly poison gas? 
Seems unlikely. He was just pointing out that although the Germans had 7,000 tons of Sarin nerve gas alone, and various thousands of tons of other even more deadly poisons ready to be deployed, they never did. Even when defeat was inevitable. 

The Japanese used their chemical and biological weapons in China. Plagues and diseases were dropped on towns and villages killing large numbers of civilians. The Chinese had no gas.
They also experimented with hot air balloons containing explosives floating across to America. They launched thousands and at least one killed a picnicking family.
 A pretty useless weapon, the hot air bomb. But development was already underway of a chemical balloon bomb that would poison Americans. It is possible Japan, advanced compared to the Allies in biological and chemical weapons, may have deployed them in defence of the homelands and after an Allied invasion of mainland Japan.

The Americans themselves had vast stockpiles of poison gas. US troops on D-Day had special rubber gas pouches for gas masks The lead assault waves had gas impregnated uniforms, supposedly to render some gases ineffective. Reports said it made the wearers nauseous. All allied troops on D-Day had a paper armband that would change colour if some types of gas was detected.
So the allies were expecting the possibility of its use.
The Russians had stockpiles and of course, so did the British. The Anthrax experiments were real. And they didn't begin until 1942. After the threat of invasion had passed. Anthrax was going to be an offensive weapon. Churchill frequently asked for gas to be used. His top brass talked him out of it.

It was the military, on all sides, and surprisingly, Hitler who was totally against, that stopped the use of gasses. It would be counter productive. It was the MAD-WMD of its day. If one side used it, all sides would use it and there would be no winners. Untold civilian deaths. Cities uninhabitable and armies having to fight in gas capes and gas masks. The Germans worried the Allies had the same very deadly nerve agents they had.{They didn't}. The Allies worried about poison gas bombings of civilians in cities. Both sides knew how the battlefield was made almost impossible to traverse after gas attacks. That the use caused many casualties to the side using them and made attack ever more harder than defence.

So there is no historic dispute that poison gas was available to everyone and everyone decided they had more to lose than gain by using it.

And what the fellow said was - "Even a madman like Hitler wasn't mad enough to use gas."

Marginally less of a stupid statement than Ken Livingstone's "Hitler was a Zionist."
 But even that, when you boil down to what Livingstone was trying to say, was factually, if not actually correct. It's an interpretation. A foolish one. A ridiculous one.
Hitler did consider deporting Jews. He did agree to allow Jews to go to Palestine in return for their stolen assets and a hope to stop the World Jewish ban on German exports that worried the Nazis exporting economy.
Livingstone knows all this. But chooses to interpret it as somehow Hitler may have been in alignment with world Zionism, early on. Who knows why he wants to believe that?  But the facts, if taken in isolation, can support that theory. 

So, in my view, it is wrong to call for the resigning or expelling of either of these men. They both said true things. In an insensitive way. That was very likely to provoke a reaction they hadn't wanted.
But that's true of a great many people. And their punishment has been they have had a ride on the outrage bus that has taken them to all manner of destinations. none of which was the one they were hoping to arrive at when they were making their original point.

Oil Price Falls: and UK Energy Policy, Too

Brent's run below $100 is sustained, and everyone's noticed now.  There are no signs any of the big producers can afford to stop the oil flowing - quite the reverse -  and a number of people's cunning plans are looking a whole lot less clever than when we were in 3 figures.  Russia / Ukraine and Saudi / Syria come quickly to mind: but let's not lose sight of something a whole lot nearer to home, viz DECC's entire energy policy.

This, as you will recall, is predicated on gas prices rising forever, so that the subsidies to nukes and renewables will provide us electricity that is costly, but "cheaper than it would have been otherwise".  This was always the merest sophistry, but they'd rigged their forecasts to make it look possible.  

However.  As we've been reporting here for months, gas prices have also been falling markedly all year, to the extent that even DECC has noticed.  (It is fun to imagine the agonised sessions between Sir Humphrey and Davey.  Must we really change the numbers, Humphrey ?  They are only forecasts, after all ... )  They've felt the need to 'update their forecasts' - downwards, of course - which is to say they never knew what was going on and they still don't.

In principle you'd say the timing of this couldn't be worse for EDF's nuclear power contract which is now even more out-of-the-money than it always has been - but is not yet signed !  However, Brussels is telling everyone that the last act of the outgoing Commission will be to give the thumbs-up to the wretched thing; Cameron has boasted about his new nukes very recently indeed; so there's every sign that sheer political momentum may carry EDF over the line.  (Apparently Austria is trying to veto it, but do they really have the clout ?)

For the UK there is one modicum of comfort: Osborne only signed off on the nuke + renewables subsidy schemes after placing an absolute cap on the cost.  As gas prices fall, this cap will be reached all the more quickly and we will be lumbered with less wind farms etc.  This is actually important because they cause a lot of practical problems for the management of the grid, and raise a lot of other extra costs that (wrongly) aren't counted as subsidies and so do not count against the cap - we just pay them anyway.

There's an equally modest bit of comfort for Putin, too.  Last time gas prices fell (2008-9 and again 2011), the oil price was not falling in parallel.  This meant that the massive oil-indexed wholesale contracts used by continental gas buyers for their Russian (and other) supplies became horribly out of the money: and all the big buyers initiated 'price review' actions against Gazprom.  The sums involved were big, and it got very nasty - most of them couldn't be resolved in the smoke-filled room and went to arbitration, one even to court - and Gazprom lost the lot to nil, coughing up very large rebates as a result.  This time, it looks as though oil and gas prices are falling sufficiently in parallel that another series of bust-ups may just about be avoided.

ND

Tim Yeo & Gas: Onto Something, Not What He Thinks

We have often had cause here to refer to the central role played by the natural gas market in the UK energy sector, beyond the fact that it provides a very large share of our primary energy, particularly for heating and (sometimes) for electricity.

The additional, crucial factor is that the wholesale price of gas can be (and in the past, often has been) price-setting for wholesale electricity prices: and in the UK the electricity sector is twice the size (by £££ gross) of the gas.  Since the dreadful days of Mili-Ed as energy secretary, UK energy policy has been predicated on the price of gas rising indefinitely, which is how DECC justifies the otherwise quite unbelievable prices - and index-linked to boot! - it is offering to nuclear, wind, solar, biomass etc etc.  We've already recorded here how wholesale gas prices are falling across Europe and the Far East: one glance at how those guaranteed 'low-carbon' electricty prices will look if gas stays soft for the next decade, and you realise what a gamble, a potentially suicidal gamble, this is.  (And all in the name of 'no-regret' policies !)

[Before anyone says, aha, but what about security of supply!? the answer is: it's the same thing.   If the supplies can't be secured well, the demand ain't going away so the prices will rise accordingly.  But actually, the supplies can be secured, provided we diversify intelligently.  It's called trade, and we've always been quite good at it.]

Of course, the fact of wholesale gas prices falling while retail prices stay the same has resulted in the retail sector being referred for a CMA enquiry - as well it might, because the issues are complex.  Now, up steps the disgraced Yeo: the enquiry will be “compromised from the outset” if it does not look at the wholesale gas market, says he, and currently the CMA is not minded to do this.

What's the answer?  Yeo is right to draw attention to the pivotal role of the gas market (see above): but that's as far as we need to agree with him, and the CMA is well-justified in taking the wholesale gas market as a given (see here, para 62-64).

That's because it is, and has been for several years, as close to being an open, competitive, international market as you'll find in most commodities.  Price formation is very well-behaved analytically which is always a good sign.  It is clearly based on the fundamentals of international supply, demand and logistics.  It arbitrages tightly (another good sign), has decent liquidity in Europe (& excellent liquidity in N.America), and has blown away Gazprom's very determined efforts over many years to have gas prices indexed to the price of oil - no small matter when the dominance of Gazprom as a producer is considered.  There are some subtleties:  what, for example, if UK power prices entirely cease to be set by gas price at any time, but are instead set by (e.g.) renewables and/or coal, as is mostly the case now in Germany?  However, the gas market remains a given in examining such possibilities.

In fact, the 'independence' of the international gas market is the one saving grace when DECC is busily trying to rig every aspect of our electricity sector (to call it a 'market' any more is to do violence to the term).  With every decision, regulation and diktat they prove just what unreconstructed interventionists they are at heart in a sector they control via the sweeping powers of the baleful 2013 Energy Act.  But, much as they would dearly love to, their ability to control the gas market is almost as limited as their ability to control oil.

As gas (and oil) price sink slowly in the West, and in the East, Praise the Lord for that.

ND
 

The Oil-Price Dog Still Isn't Barking

Catching up with the newspapers, one might be forgiven for thinking that Armageddon looms.  But then we turn to the market data for the traditional calibration and yes, the price of oil is gently falling: we are back to $108.  The combined agonies of Gaza, Iraq and Donetsk do not register on the curve.

European natural gas prices continue to fall even more markedly.  The premium over the the US price - for several years a very scary thing for European industry and economy as a whole - is down to under 50%, the lowest it's been for a long time.  (It was more than 200% as recently as last November.)  Even more striking, Far East LNG spot-prices are back down to pre-Fukushima levels.  Of course it's a hot spell in summer right now, but this goes beyond the usual seasonal dip. 

Putin shows every sign of being personally very uncomfortable, and low prices for his primary exports aren't going to improve his humour.  What on earth will he do next ?

ND

One Eye On Oil and Gas Prices

But only the one, because oil really isn't doing very much.  $115 has been breached, but it looks like a bit of a resistance-level for now.  Bullion much the same.  $120 can't be ruled out but the Russians have been pretty quiet on Iraq - in principle (if such a phrase has any meaning in Realpolitik) they should be onside against ISIS, so unlikely to act in ways deliberately to stoke the price of oil, however much it would suit them.

Gas is strategically important too, and the price more interesting recently.  It's been falling steadily since the start of the year (more than just the usual seasonal effect), here and in the Far East, interrupted by a one-day blip last week - a kneejerk on Gazprom's recent action against the Ukrainians.  Then back on its downward path.  Cutting off supplies to one country means, errr, more available for others ...  

Yes, gas is over-supplied right now.  This could change when European coal-fired power plants stop maxing out, as eventually they will: though even some of those are converting to biomass, and of course Germany and Poland are still building more.  So 'eventually' could be a few years off yet.  

Thus, UK energy policy, long predicated on ever-rising gas prices, looks ever more stupid.  Can HMG really be going to sign that crazy nuclear deal with EDF ?  I attended an excellent academic conference on energy last week, and every speaker - most of whom are working on some green-oriented project or other, if only because that's where all the money is - rolled their eyes at the mention of £92.50/MWh (the EDF price before index-linking kicks in):  they all seem to view it as the highest price that will in practice ever be paid for a large-scale electricity supply, along with the next few UK offshore wind contracts of course.  As such, they see it setting a ceiling.  

Even better, of course, it should be seen as a nightmare from which we will all wake up and get on with life on a rational basis. Can the EC please get on with its ruling that the CfD constitutes illicit state aid ?

ND

Centrica denied subsidy - a small victory

No doubt Mr Drew will update this later, but initial reaction this morning to the news that Centrica won't be building offshore or onshore gas storage is that I am surprised and pleased.

Clearly, without subsidy this project could not go ahead and so Centrica have shelved it. Also, given market dynamics there was no demand for this project without a huge government subsidy. This is as it should be, no market need, no pay taxpayers moollah.

 Moreover, only in April Centrica announced a deal with Cheniere energy to supply shale gas to the UK. So we have a nice diversified supply set, Norway, North Sea, Qatar and the US, with the interconnector as a last resort for Russian gas. This is why the UK does not need 3 months storage like say Germany, which is hugely dependent on the whim of Moscow for its gas supplies.

The only slightly worrying part of this story is that the Lib Dems are in charge of DECC, this means that this subsidy was more likely denied because the Lib Dems hate the idea of a dash-for-gas which puts such a commonsense and commercial hole in their preferred dash-for insanity (otherwise known as windfarms) policy. Sadly the windfarm subsidies far, far outweigh anything Centrica is asking for gas.

So its a small victory for the market and Government policy today, but a small victory in a losing war for taxpayers.