The energy companies are softening people up for large gas price increases

 

We have had a gradual softening up of UK natural gas consumers over the past week in order to prepare them for a hardening in gas prices. Centrica (formerly British Gas) have warned through their managing director Jake Ulrich that gas prices could rise by 60% by 2010 and everyone in power and business has finally seen the blindingly obvious light; the era of cheap energy is over. We are now well into the energy age. Not everyone has thought through the consequences of expensive energy and those in power who have been thinking about it, have not really come up with any solutions.

A few days after Mr Ulrich’s statement Centrica let out that gas prices were likely to rise by 30% soon. I suppose having talked about 60% then 30% seem like a good deal. Don’t worry; the 60% will come and so will higher and higher gas prices.

Mr Ulrich suggested that people may have to put on an extra sweater. The Daily Mail thought this incredible impudence from a man whose salary is so high that he would not even be mildly inconvenienced by a price rise of 600%. I disagree with the Mail. Mr Ulrich in fact tendered good advice; in essence we have to find some way of using less gas.

Some commentators and pressure groups are blaming the gas price link to oil prices for the scale of the increase, with Energywatch describing the link as “toxic” and recommending the severance of the link, which they believe will reduce gas prices.

I am not so sure that this is a solution. Gas is mainly used in ways that oil can also be used – home heating, industrial power and generating electricity. The prices will inevitably be linked in this way, even if any formal wholesale contractual links were severed, we live in the real world and ultimately that is what will govern the gas price.

We also have to factor in the way in which nations with important national resources permit those resources to come onto the international markets. When Britain had huge coal reserves and was exporting vesting quantities of the stuff, the coal producers did not concern themselves with getting a “fair” price from nations to which they sold coal. They charged what the market would bear. The world’s largest producers of diamonds – South Africa and Russia, arrange their affairs in a way to maximise the price of diamonds, not to provide everyone with cheap gems.

Oil and gas producing nations will realise that (a) they have to get the highest prices for their fuels, because the fuels are in finite supply and they owe their own people no less and (b) it is their turn now to be at the top of the tree.

As India and China and Brazil and Indonesia and Mexico and other nations that are developing rapidly become more prosperous we will find that we will be competing with them for all fossil fuel. That will send the raw price of fuel higher and higher, and even if we save more and use less (as we will do) costs will inevitably rise. There may be small occasional falls but overall I cannot see the prices doing anything other than rising. This will not be mere inflation; the prices will rise in real terms. We will all have to work longer or give up more of our savings to heat our homes and water, whatever source of energy we use.

There was some nonsense spouted in one of the Government’s Energy White Papers (2003) about being able to rely on the markets to provide cheap energy and even more nonsense spouted in the next White Paper about making sure that the UK got “its fair share” of energy.

If you think it helpful to play the blame game then do not blame oil-gas price coupling, or the so called greedy energy companies. Perhaps it is worth blaming a political system that sees eight energy ministers in ten years, an energy minister outside the cabinet, and a political system that spends more tax pounds on the BBC in seven hours than it spends in providing solar thermal incentives in three years.

Rising energy prices will have a knock on effect on all raw materials including those that are used to make up solar panels and PV panels and wind turbines. That knock on effect has not yet kicked in and I do not expect it to for two or three years. Now will be a good time to buy your solar panels. Otherwise you may send up spending much more than you need to spend.