Saturday
Jul092011
by 
Bishop Hill
Bishop Hill Gas prices
Jul 9, 2011 Energy: costs Help me with something, dear readers. UK retail gas prices are going up by 20%, apparently because of a hike in wholesale prices caused by turmoil in Libya and demand in Asia. Yet when I look at this chart of US prices, I see no sign of any recent hike worth the mentioning.
Is this because the UK wholesale market is very different? Where can I find a graph of UK wholesale prices? Is some other factor other than supply and demand involved?
I find it hard to equate the vast new supplies coming on line from shale gas deposits with the prices hikes we are seeing.
Reader Comments (81)
I thought the natural gas market was much more regional than the oil market (global). I don't think there is a lot of gas imports/exports across oceans.
I know shale gas is going gangbusters in the US, but I didn't think the process had been widely deployed globally yet. Hmm. Time to do a bit of research!
-J
Natural gas is priced locally. It's expensive to transport so US prices have nothing to do with UK prices or Russian prices.
Bish
The trouble with gas is that it's not internationally fungible and hence it is a regional not an international market.
Oil and coal can be loaded on ships and can move from places of surplus to places of shortage. Gas can't do the same unless there's a pipeline.
The only way to move gas intercontinentally is as LNG. To make a gas liquefaction plant pay, you need at least 6 trillion cubic feet of exportable gas, which typically means you are a country as opposed to a company. You can then liquefy it, load it on LNG tankers and ship it to customers who have regasification capacity and a shortage of gas.
In the US, the issue is shale gas, huge quantities of which have come on stream in recent years and basically halved the price of gas. This gas is physically unable to leave the USA (and even if it could might fall foul of the Jones Act which forbids the export from the US of raw hydrocarbons).
If you want a better idea of UK gas prices try https://www.theice.com/marketdata/reports/ReportCenter.shtml.
Select "End of Day Report" for category, "ICE Futures Europe" for market and "ICE UK Natural Gas Futures monthly" for report. Then enter your preferred dates. The fourth column, "settlement", gives you the end of day price.
As at yesterday the price of August gas was 56.13p. In January it was 56.16. These reflect UK supply costs so yes, it is hard to see how an 18% price rise is justifiable on the basis fo physical supply cost. Gas for prompt delivery has actually got cheaper since last quarter.
Okay - here is the basic problem with the gas shale - it costs about $6-$7 per thousand cu ft (kcf) or million btu to produce in the US. The current price is about $4.25 per kcf. Most folk in the industry and related government know this - hence the lack of much interest when the NYT released the internal e-mails a couple of weeks ago. (See my comment at http://bittooth.blogspot.com/2011/06/gas-shale-e-mails-and-nyt-stories-about.html). The market is currently being sustained on hedged sales from before the price dropped and hope that it will get better. The story is a bit different in other countries that have less indigenous fuel.
In regard to why gas prices aren't going down, well even though the IEA got folk to release oil it was at a time that summer demand was rising (as it does each year) with OPEC predicting a 2.4 mbd rise over the rest of the summer. Thus the IEA release (at a max 2 mbd for a month) merely eased possible supply shortages (remember Libya cost the market 1.6 mbd) but didn't totally do away with them. The reason that prices change faster in Europe is that you are closer to the supply, it takes a longer time for a tanker to reach (or not) the US or Asia (where Saudi keeps popping the price up). You're also seeing the speculator volatility as the ripples on the supply problem wave.
My post showing the anticipated increase that OPEC is expecting is here (http://bittooth.blogspot.com/2011/06/iea-release-of-60-million-barrels-of.html).
Oops, sorry misread the post and I thought the 18% rise was gas as in petroleum, instead of gas as in natural gas. The problem that the UK has with natural gas is that the country is changing from relying on a domestic source to a greater reliance on imports, and there you have to pay what the seller would like (particularly if you are buying your gas from Gazprom and not Qatar.
In our country (Holland) gas prices are linked to the oil price and are adjusted every 6 months. Not sure abt that in other countries though.
Presumably gas on the futures market contains a premium to cover the risk of the pound depreciating in the face of crisis in the euro market?
Justice4Rinka
Is it possible you have some other legislation in mind? Jones Act 1920 (w/modifications as recently as 1999 directed mostly to waivers under specific circumstances) proscribes shipping of goods or people on ships not built in US or with crews not citizens of US, or registered somewhere other than the US.
Since several LNG terminals are reputedly converting/or planning to convert to shipping from receiving, are you certain about legislative constraints on US shipping gas overseas?
Effects of Jones Act can trickle down even to small boats.
Oops. Add shipping between US ports to the above. bringing stuff in and taking it out can be done by anyone on anything meeting various international standards for the usual things.
sorry.
Maybe we should ask Merv the Swerve? He knew back in May when issuing the Quarterly Inflation Report.
“Inflation will hit 5% as growth slows, predicts Mervyn King”
“Bank expecting domestic gas bills to rise by 15% and electricity bills 10% this year in latest blow to household finances”
• The Guardian, Thursday 12 May 2011
http://www.guardian.co.uk/business/2011/may/12/inflation-rise-predicts-mervyn-king
Since when has it been the remit of the Governor of the Bank of England to pave the way for the supply companies? The above statement ensured a minimum increase level.
Where was the statement calling for prudence and restraint recognising that there might be pressure on energy prices but expressing the need for supply companies to keep price increases to a minimum? No he effectively set a minimum for them, a minimum? Just what is going on?
I don’t have an answer your question Bish, but will try to find out. Maybe our MPs know? Not holding my breath, my MP doesn't seem to use email.
Here in the States, we are seeing prospective LNG plants being cancelled. The need for overseas LNG imports is going down as domestic production is going up.
You may want to send a letter to a certain M. Thatcher if you don't like gas prices. She seemed to think that selling the utilities off and trusting to the market would bring prices down. She was woefully wrong. If you're a dancer rather than a writer, then wait a few months and have your shoes at the ready. They might as well make it easy for people and bury her under a nightclub.
Do stop blaming Mrs Thatcher for everything. A lot has happened since 1990!
How many governments have we seen come and go since then? I've lost count.
It's time to drag yourself into the 21st century and face up to the threats that we face now.
There's no shortage...
Zed
I suggest you do a bit of research -- get you off our backs for a while.
Energy prices during the six months prior to privatisation.
Energy prices on a six-month basis thereafter adjusted for inflation.
Come back with the results.
US gas prices are about half those of the UK right now, because of a supply glut from shale gas in the US, versus a demand glut elsewhere in the world, especially in Japan where ten nuclear and several coal fired power stations are shut, plus of course gas demand from booming China. Also most contracts tie gas prices to oil prices outside the US. The difference between gas prices in the US and the UK can persist because of the lack of a world market owing to the difficulty of transporting gas.
Hi Zed,
wow, is there no beginning to your knowledge on so many subjects. I too look forward to seeing the evidence for your claim as requested by MikeJ.
As a trainee accountant for the CEGB I had great fun using what at the time were new fangled spreadsheets (on a portable the size of a suitcase!) to produce the P&Ls for each power station during the break up. I was then made redundant (voluntarily) during the privatisation.
My recollection is not as you state but happy to be corrected.
@Justice4Rinka
They do ship LNG round the world in large tankers. They're the ones that have half the spherical tank showing.
Hoi Polloi' comments on Petrol and gas prices being linked.
I have heard this also more than once in the past few years.
If oil prices rise, gas prices rise. (If oil prices fall..gas prices ????
Maybe they should be de-linked and gas prices would then find their own level.
That means, naturally, that gas prices would rise of course.
It is therfore a lose/lose situation for consumers. Nothing changes.
Just call me an old cynic.
There is an old law called Boyle's law which iIwill EXPAND on in my next post.
Give you a laugh anyway.
Peter
Bishop, apologies in advance for this, but it will give a few laughs.
Peter
HELL EXPLAINED BY CHEMISTRY STUDENT
The following is an actual question given on a University of Washington chemistry mid term.
The answer by one student was so 'profound' that the professor shared it with colleagues, via the Internet, which is, of course, why we now have the pleasure of enjoying it as well :
Bonus Question: Is Hell exothermic (gives off heat) or endothermic (absorbs heat)?
Most of the students wrote proofs of their beliefs using Boyle's Law (gas cools when it expands and heats when it is compressed) or some variant.
One student, however, wrote the following:
First, we need to know how the mass of Hell is changing in time. So we need to know the rate at which souls are moving into Hell and the rate at which they are leaving. I think that we can safely assume that once a soul gets to Hell, it will not leave. Therefore, no souls are leaving. As for how many souls are entering Hell, let's look at the different religions that exist in the world today.
Most of these religions state that if you are not a member of their religion, you will go to Hell. Since there is more than one of these religions and since people do not belong to more than one religion, we can project that all souls go to Hell. With birth and death rates as they are, we can expect the number of souls in Hell to increase exponentially. Now, we look at the rate of change of the volume in Hell because Boyle's Law states that in order for the temperature and pressure in Hell to stay the same, the volume of Hell has to expand proportionately as souls are added.
This gives two possibilities:
1. If Hell is expanding at a slower rate than the rate at which souls enter Hell, then the temperature and pressure in Hell will increase until all Hell breaks loose.
2. If Hell is expanding at a rate faster than the increase of souls in Hell, then the temperature and pressure will drop until Hell freezes over.
So which is it?
If we accept the postulate given to me by Teresa during my Freshman year that, 'It will be a cold day in Hell before I sleep with you,' and take into account the fact that I slept with her last night, then number two must be true, and thus I am sure that Hell is exothermic and has already frozen over. The corollary of this theory is that since Hell has frozen over, it follows that it is not accepting any more souls and is therefore, extinct........leaving only Heaven, thereby proving the existence of a divine being which explains why, last night, Teresa kept shouting 'Oh my God.'
THIS STUDENT RECEIVED AN A+
Bishop,
I hope that you're not out of a job if the previous post about Heaven and Hell turn out to be true.
Peter
You have to factor in FX rates.
It is generally observed (and acknowledged) that natural gas prices tend to follow the path of the oil prices with a time lag.
Since 2005, UK has been a net-importer and has lost the competitive edge self-sufficiency provided. The UK has become massively gas dependent since the 1980's and has now to compete in the established European market with its long-term contracts and the inflexibility derived from the history of natural gas's introduction to the energy marketplace in the 1960s when it was seen as a competitor to coal, oil and nuclear and of undermining established capital investment.
A weak pound today doesn't help much either..
Thatcher has nothing to do with the current situation...but the state-sponsored contracting in Europe does. Unlike USA, natural gas in Europe is sourced from 'unstable' suppliers. North Africa is a case in point. Russia another. There is a security premium and although natural gas is super abundant, the oil price connection determines the wholesale price. No country wishes to get too dependent on insecure imports therefore gas cannot be allowed to get too cheap and displace other sources in the energy mix.
For the consumer, though, taxation is a very important element...VAT, Green taxes etc.
For those the Governments are responsible directly.
In the US "fracking" is releasing shale gas in quantities that have glutted the market. On this side of the Pond the Greens are desperately trying to outlaw fracking with their usual scare stories and lies. France has already fallen for it. (Maybe the fact they atre 70% Nuclear helped).
Despite the Luddite shouts of the Greens, shale gas will soon be available. The only thing that will stop gas prices falling like a stone are the hidden "Green" taxes.
People will then start asking the right questions with rather more determination.
The counter-revolution is coming.
A further factor is that unlike the rest of Europe, there is no gas storage infrastructure in the UK. The Labour Government saw fit to reject the option. There is no mechanism to smooth the price that stategic reserve capacity offers.
Lots of capital for windmills though.
In terms of actual and historic prices, try this:
http://www.catalyst-commercial.co.uk/energy_market_intelligence/uk_gas_prices/
The graphs here do not seem to justify current pricing ranges and changes..
Without intimate knowledge of domestic and foreign supply contracts, transmission tariffs, swing take or pay clauses and so on it is nigh on impossible to evaluate whether the increases are justified. However, instinct tells me that the downstream suppliers are seeing and raising Osborne for his budget surprise tax, and seeing and raising Huhne for his plans to offload all his full-on warm frontal subsidised tariffs on them.
See
http://en.wikipedia.org/wiki/National_Balancing_Point_%28UK%29
for what looks like the actual trading mechanism.
@Pharos, as they are not holding nukes Osborne and Huhne cannot call, never mind raise.
Fuel prices are going up because we are told they are going up.
Politicians and cartels are doing an Enron again and cutting out the little man - and the little old lady who will die in Scotland
Gas can be and is transported around the world. Australia has absolutely massive gas projects built or being built to export gas to Asia. But it has been doing this on a smaller scale for a very long time.
It is done in the form of LPG.
Lucky for the UK renewables have pretty well eliminated the need for gas so the prices really don't need to rise as there is now a glut due to the surplus of safe dependable renewables. And here you thought your money was just being wasted.
Yes, supply and demand is still everything.
This graph shows the growth in the supply of pounds sterling.
http://www.whichwayhome.com/skin/frontend/default/wwgcomcatalogarticles/images/articles/whichwayhomes/UK-money-supply.jpg
As you can see, it has increased much faster than the supply of any fossil fuel.
It comes down to pricing the general public out of the market, people will no longer be a afford to meet their own energy needs, therefore reducing the anthropogenic Impact on the environment, it's not about availability or abundance, the demand in Asia is a result of the hike in wholesale prices, energy costs and high carbon related taxes as a result businesses and industry move abroad to take advantage lower costs.
It is now £7 for a pack of cigarettes, Not because tobacco is expensive or in short supply, it is deemed unhealthy, therefore politically correct to impose a high Tax on it's consumers.
Now political correctness has deemed energy consumption a bad thing so now here come the taxes and price hikes on it's consumers.
Heading Out's production costs are totally bogus. He's just a TOD doom and gloomer.
Its 1$.
There is also a significant difference in Oil prices around the world.
Example
Brent Crude vs West Texas
Image
http://stevemaley.files.wordpress.com/2011/06/6-24-2011-4-07-45-pm.jpg
Source
http://stevemaley.com/2011/06/26/whats-the-motivation-behind-obamas-spr-release/
I notice that the ever growing cost of renewables appears to have been forgotten in the discussion and their effect on all fossil fuels
From the Ecclesiastical Uncle, an old retitred bureaucrat in a field only remotely related to climate with mininmal qualifications and only half a mind.
Green Sand's 8.48PM remarks about the Governor of the Bank of England's inflation forecast may well be interesting to anybody following up on the Bishop's question. How did the Bank come to make their forecasts on gas and electricity?
I would expect the back up data to be available somewhere.
It is nice to see Peter Walsh's hoary old story again..Always bears repeating. On a similar note, I liked matthu 7 Jul 10.48PM Unthreaded contribution and took the liberty of passing it on.
@Justice4Rinka
They do ship LNG round the world in large tankers. They're the ones that have half the spherical tank showing.
Jul 9, 2011 at 9:53 PM | rivan
Rivan, slow down and go back and read the whole of Justice4Rinka's post starting with "The only way to move gas intercontinentally is as LNG."
By the way Bish, hope you are feeling better.
jv
What are "dependable" renewables, please?
Justice4Rinka & PeteH
A subsidary of the UK company BG ( I presume this is British Gas ) is about to start the construction of a A$7.5 billion plant in Queensland to produce and export LNG from coal seam gas.
Hmmm, is this 30% on top of 18% or is it included
http://www.telegraph.co.uk/earth/energy/8627719/Power-bills-to-soar-by-30-in-green-reforms.html
Costly new incentives to encourage energy companies to invest in renewable power sources such as wind farms will put an extra £160 a year on the average household bill over the next 20 years.
The huge rise is on top of drastic increases in bills being faced already by consumers. Last Friday British Gas, which posted profits of £742million last year, announced gas price rises of 18 per cent, which followed Scottish Power saying it would increase rises of 10 to 15 per cent.
Mr Huhne is expected to announce on Tuesday that energy companies, such as Centrica and EDF, will get a fixed price for electricity generated from nuclear power and wind farms, which will be higher than the market price.
As above, natural gas is a regional, not global market.
The US has frakking thus lots of gas. The EU does not have frakking yet in any quantity and there are legal moves to make sure that it never does.
Further, traditionally, gas prices on contracts have been tied to the oil price. As they're close substitutes, seems reasonable enough. But frakking has changed that linkage where frakking has become common.
EU gas prices, contract ones, are still largely tied to the oil price.
Finally, the difference between UK and US oil prices: that's a technical matter to do with the benchmark prices. Brent is the UK benchmark, W Texas the US one. However, the W Texas benchmark is delivered Cushing OK and there are transport issues there. Pipelines going in can take more oil that can be stored or refined there. So there's a large price difference between the OK price and the refineries own on the Gulf Coast.
An oddity but that's all it is, an oddity.
The increasingly widespread use of the spelling "frakking" (an expletive) rather than the (presumably) correct "fracking" is, I think, to be deplored in civilized company. Maybe it's too late.
Hang on, weren't the graun and bbc telling us recently that our addiction to warm houses and cooked food was destroying, amongst other things, drinking water and Blackpool ? I don't think an LNG tanker is needed between Blackpool or Morecambe bay and the UK mainland. Bit of pipe would do it, no ?
jv
What are "dependable" renewables, please?
Jul 10, 2011 at 8:04 AM | Mike Jackson
Methinks there was just a hint of sarcasm in jv's comment....
I don,t think any of the posters on this site have commented on the percentage of gas used to generate electricity in the UK. According to NETA electricity summary page this is around 50% ,coal at 20% in order to meet there CO2 targets. This not only effects the cost of electricity but also the cost of gas. a double wammy. When will this carbon insanity end?
DaveS
I hope you're right. I thought I'd just check!
Politicians and cartels are doing an Enron again and cutting out the little man - and the little old lady who will die in Scotland
No she won't. Haven't you heard about global warming?
Here are the prices: ICE UK Natural Gas Futures (Monthly)
https://www.theice.com/productguide/ProductDetails.shtml?specId=910
they seem to have gone down for the last 4 months