The Lemon Fool

Can someone please explain why wholesale energy costs have gone up so much? Why haven't they simply returned to pre-covid levels?

Oft quoted reasons...

1 Higher industrial demand since covid coupled with previously lower stocks led to more demand than supply

2 Putin restricting Russian gas supplies. I think there were suggestions that he was doing this even before he invaded Ukraine.

Of course as we are so dependant on gas even for generating electricity, this causes a double whammy.

staffordian wrote:
1 Higher industrial demand since covid coupled with previously lower stocks led to more demand than supply

2 Putin restricting Russian gas supplies. I think there were suggestions that he was doing this even before he invaded Ukraine

But isn't the higher cost of living making people buy less? Or is there a lag in the effect of inflation and the downturn will soon follow?

Another reason was that in the recent winter there were long periods when particularly onshore wind turbines were not contributing much because of the weather conditions, increasing demand for more gas to generate electricity.

In the FT this morning there is an article telling us that Europe has been buying all that Russian gas at spot prices since the financial crisis of 2008 when it was a buyer's market. That has also driven up the spot price.

In the UK we appear to be almost self sufficient in gas but of course the gas price is international so the retail market has got to pay the current world price.

That's my understanding anyway. There are others no doubt who can expand/clarify that.

Dod

MrFoolish wrote:

staffordian wrote:
1 Higher industrial demand since covid coupled with previously lower stocks led to more demand than supply

2 Putin restricting Russian gas supplies. I think there were suggestions that he was doing this even before he invaded Ukraine

But isn't the higher cost of living making people buy less? Or is there a lag in the effect of inflation and the downturn will soon follow?

I'm no expert, but I think on a global scale, demand is pretty high. Pent up demand from many who spent less during the Covid lockdowns, for example.

Agree the future might not be so promising though...

Dod101 wrote:In the UK we appear to be almost self sufficient in gas but of course the gas price is international so the retail market has got to pay the current world price.

We've not been self-sufficient in gas for 20-odd years, we currently produce just over half the gas we use. See DUKES for more details :
https://assets.publishing.service.gov.u ... al_gas.pdf

One reason we're in the current mess is that government still has the mentality that we are a net exporter rather than importer of gas - because we were a net exporter we were exempt from the EU requirement to maintain large stockpiles of gas, but we didn't build additional storage once we started importing, and when our main store at Rough broke in 2017, the government saw no reason to do anything about it.

I don't agree with all of this piece, but it gives a bit of an overview : http://www.dieterhelm.co.uk/energy/ener ... gy-policy/

Also historically gas has been a series of regional markets, whereas the advent of significant amounts of LNG that can go wherever needs it most, has meant that the marginal joule of gas in most markets now comes from seaborne LNG at "the [world] market price". Which is particularly high at the moment as Japan (historically the largest consumer of LNG) has high demand right now due to colder-than-usual temperatures and nuclear power stations being offline due to an earthquake. So you've had Europe in a fight for LNG with the Far East, hence higher prices.

MrFoolish wrote:But isn't the higher cost of living making people buy less? Or is there a lag in the effect of inflation and the downturn will soon follow?

Energy is pretty price-inelastic, people tend to go without other things rather than reducing energy consumption significantly at an economy-wide level. But a spike in energy prices is fairly reliably associated with recessions 12-18 months later.

Hallucigenia wrote:Energy is pretty price-inelastic, people tend to go without other things rather than reducing energy consumption significantly at an economy-wide level. But a spike in energy prices is fairly reliably associated with recessions 12-18 months later.

Two winters back, whilst WFH, my boiler broke down and was out of action for a couple of weeks. It was miserable for a few days but then I got totally used to it.

We can acclimatise to colder conditions if we don't keep going into overheated buildings. If there was some legal limit on the heating for public buildings, e.g. 19 deg C, we could all be happier with heating our homes less.

MrFoolish wrote:

Hallucigenia wrote:Energy is pretty price-inelastic, people tend to go without other things rather than reducing energy consumption significantly at an economy-wide level. But a spike in energy prices is fairly reliably associated with recessions 12-18 months later.

Two winters back, whilst WFH, my boiler broke down and was out of action for a couple of weeks. It was miserable for a few days but then I got totally used to it.

We can acclimatise to colder conditions if we don't keep going into overheated buildings. If there was some legal limit on the heating for public buildings, e.g. 19 deg C, we could all be happier with heating our homes less.

I suspect that that is true although I like to be warm!

Dod

MrFoolish wrote:

Hallucigenia wrote:Energy is pretty price-inelastic, people tend to go without other things rather than reducing energy consumption significantly at an economy-wide level. But a spike in energy prices is fairly reliably associated with recessions 12-18 months later.

Two winters back, whilst WFH, my boiler broke down and was out of action for a couple of weeks. It was miserable for a few days but then I got totally used to it.

We can acclimatise to colder conditions if we don't keep going into overheated buildings. If there was some legal limit on the heating for public buildings, e.g. 19 deg C, we could all be happier with heating our homes less.

Two winters back, whilst WFH, my boiler broke down and was out of action for a couple of weeks. It was miserable for a few days but then I got totally used to it.

After my Grandad died, our Grandmother came to live close to us and as a teenager, I used to spend most weekends with her, cut the grass, do little jobs and generally get away from my noisy parents and sisters! Her house was MUCH colder than ours but after a while I got used to it, wearing slippers (a teenager wearing slippers - Shock-Horror!) and even taking a hot water bottle to bed. It can be done!

A bit like when our TV broke and we had to wait about 2 weeks for a replacement. No Blue Peter, Magpie etc! I think my hard-working Dad suffered most, but after a few days, I simply started listening to more music and again -Shock-Horror, started spending more time on my homework. Maybe kids adapt faster but I remember feeling strangely disappointed when a new TV appeared. But not for long.

Steve

To me it's very obvious: the spike in energy prices is caused by inflation of the money supply. It's no coincidence that commodities and real asset - things than cannot easily be conjured up on demand - spike in times when the amount of currency is heavily diluted.

Over the long term, by continually manipulating monetary policy so much in an effort to keep the economy going, central banks have tampered with the market determined structure of production, distorted pricing signals and created large imbalances in the economy. These problems were already there, but the unprecedented amount of monetary stimulus created to keep the economy afloat over the covid lockdowns has kinda been the straw that broke the camel's back and overwhelmed the longer term (mildly) deflationary forces at play.

Agree with everything said already but there is also the long term oil/gas price factor. Because of low oil prices for the last seven or so years, exploration has been depressed, rigs lying idle, and so there have been fewer new discoveries. This has been exacerbated by the environmental movement, who have made investment in exploration and production of hydrocarbons (particularly fraccing) a dirty word. These things have consequences, and as the demand post covid has mushroomed, so the price goes up.

Nimrod103 wrote:Because of low oil prices for the last seven or so years, exploration has been depressed, rigs lying idle, and so there have been fewer new discoveries. This has been exacerbated by the environmental movement, who have made investment in exploration and production of hydrocarbons (particularly fraccing) a dirty word. These things have consequences, and as the demand post covid has mushroomed, so the price goes up.

Personally I am enjoying the irony of the green movement's antics directly leading to $100 oil and $6 natural gas, thereby making the companies they hate become very profitable again. My Chevron shares have tripled in less than 18 months. So thanks, Greens.

MrFoolish wrote:Can someone please explain why wholesale energy costs have gone up so much? Why haven't they simply returned to pre-covid levels?

Who did you expect to pay for Net Zero?

anon155742 wrote:

MrFoolish wrote:Can someone please explain why wholesale energy costs have gone up so much? Why haven't they simply returned to pre-covid levels?

Who did you expect to pay for Net Zero?

That's easy.

The future.