Energy prices, free markets and Russian Gas

The last of the big six energy suppliers, Scottish & Southern Energy, announced a price rise a couple of days ago which will take effect from 1^st April 2008. They blame wholesale price increases and they are right to do this. They also point out that transmission costs are also going up as are “environmental costs”.  

Like all energy suppliers Scottish and Southern have a number of different tariffs. On average electricity is rising by 14.2% and gas by 15.8%. Oil is today standing at around $110 a barrel.  Trying to see where prices will end up is difficult. There is the possibility of price falls due to the present economic turmoil.

The banking crisis may cause loss of confidence which in turn may lead to an economic downturn with people being laid off and companies failing. If this happens there will be a reduced demand for energy and if this were to happen energy prices may fall. Some people believe that energy prices are high because of speculation. If this is true it may also bring energy prices down. 

My view is that energy prices will continue to rise even with an economic downturn. The lowered demand from the developed nations will be more than taken up by a higher demand from the populous developing nations and in particular China, India, south east Asian countries and Latin America.

Although these nations will be affected by a down turn their increasingly wealthy populations will take up any slack that the West gives out. If you have an opportunity to fix energy prices with a supplier for the next five years then you will probably (in my opinion) save money from doing so. Similarly it would now be a good time to invest in microgeneration as you will save more as prices rise. 

The banking crisis is mainly affecting the Western developed nations. I would expect that if our economies turn down we will see investors from other economies picking up some cheap bargains in the European Union and in the United States. One person’s difficulty usually provides an opportunity for someone else’s profit. 

If there is an economic downturn then I would expect investors from Russia, China, and the Arab countries to pick up some cheap bargains on the western stock exchanges. They will be looking for safe investments which have a safe and reliable income stream and a consistent demand for the supplied goods. Ideally they will like to be able to profit from some vertical integration with their own businesses. I think this makes energy companies a prime target for foreign investors.

The European Commission has been attempting to “liberalise” energy markets so that energy markets within the European Union are open to all. Such openness would enable the Russian state owned energy giant, Gazprom, (you will hear more and more of that name in the future) to dominate the EU energy companies by acquiring significant shares.  

Russia has caused concerned when it cut off the pipeline to former soviet states several times in recent years, ostensibly because of difficulties in securing appropriate payment for gas. This has created a fear that Russia might well use its vast reserves of energy to secure political advantages and economic advantages.

Frankly, I would expect any nation to do this. When the United Kingdom discovered North Sea oil it did not hesitate to deploy the economic and political benefits that the discovery brought for its citizens. 

The European Union’s Commission’s strategy is to propose a tough law requiring an energy company from outside the EU wanting to buy into an EU energy company to be operating in a place where the EU energy companies would be allowed to buy energy companies in that place. This proposed rule is described as “reciprocity” and is aimed at Gazprom because the EU feels that EU energy companies have been excluded from investing in Russia. 

So far Russia has steadfastly refused to permit foreign businesses to freely participate in the Russian energy markets. BP claims to be unfairly treated. I have no problem with Russia excluding foreign companies from its internal energy markets. Energy is a critical requirement without which a modern state cannot successfully exist. If people are deprived of energy unrest, conflict and unhappiness arises and the state descends towards anarchy. 

I can see a risk in the future of Russia agreeing to the reciprocity clause at a time when the EU energy companies are too weak to buy into the Russian energy companies and the Russian Energy companies are awash with money looking for a suitable home.  

If that happens the EU’s liberalisation policy will have failed the EU’s citizens; the purpose of the policy is to establish an open energy market to ensure that competition keeps prices low and to provide the benefits of choice. Instead we will have a quasi monopolistic market where there is no significant choice on price, service or product, which is pretty much as we have now, but with the added danger of control by a foreign state.