'shell-shocked' Companies Call For Freeze On Energy Prices

[El_Pirata]

"An organisation representing the National Health Service, Tesco and other top companies has called for a moratorium on further rises in gas and electricity prices.

The Major Energy Users' Council (MEUC) urged utilities such as British Gas to hold back plans to further increase bills and instead work cooperatively with "shell-shocked" customers.

Andrew Bainbridge, director general of the MEUC, said: "We need a moratorium because our members are already shell-shocked by a series of price rises and there is no way they are going to be able to claw back the extra costs.

"Further price increases will force companies out of business and suppliers must work in partnership with their customers through this difficult period."

More than 100 NHS hospitals are on interruptible gas contracts, which mean supplies can be switched off with only four hours' notice, the Department of Health told the Guardian.

But the spokesman said all these sites were served by dual-fuel facilities, allowing them to transfer to oil-based generators backed up by large storage tanks. "Patient care will not be affected. All NHS sites are highest-category priority except for a tiny minority that have alternative power sources," he said.

As independent suppliers warned that they were themselves low on capacity, the Department of Health refused to give details of how long hospitals could survive without further deliveries of oil.

The Association of United Kingdom Oil Independents has told the government that its members had never experienced such protracted and widespread problems. The Russian gas stand-off with Ukraine and other factors leading to soaring prices have encouraged power stations and other gas users to switch to oil.

Meanwhile, the Buncefield oil depot fire, the run on oil and other fuels due to cold weather, and a faster than expected rundown of North Sea supplies have caused chaos across the energy sector.

The CBI has attacked the government for not doing enough to resolve the problems but Mr Bainbridge said that the CBI boss, Sir Digby Jones, and his members must take some of the blame.

"British business has not taken the subject [energy] seriously enough in the past. Digby needs to lambast his own members for not giving the skills, training and status to energy buyers. Until recently, energy has not been seen as sexy, like marketing or making money," he added.

The price of gas has fallen in recent days on the back of a resolution of the row between Russia and Ukraine, plus warmer weather. But only last week British Gas's parent company, Centrica, warned that surging wholesale prices would force all suppliers to raise their bills during 2006 following double-digit increases last year.

This week, npower and Scottish & Southern Energy raised their bills to householders. Industrial users have started to close facilities for extended winter breaks to save money.

Statistics released by the Department of Trade and Industry yesterday underlined the fast rundown of local energy supplies, with imports of gas up by 80% in the third quarter, compared with the same period in 2004.

Meanwhile, the fragility of the oil and gas supply infrastructure was highlighted by a problem reducing output from Shell's Pernis plant in Rotterdam, Europe's largest refinery."

http://business.guardian.co.uk/story/0,16781,1680332,00.html

Somebody's got to pay for the gas. Why should British Gas subsidise Tesco?

Note: Andrew Bainbridge, director general of the MEUC, said: "We need a moratorium because our members are already shell-shocked by a series of price rises and there is no way they are going to be able to claw back the extra costs."

At some point they will have to claw back the costs buy raising prices. If some companies go out of business first, it will only ultimately boost the pricing power of those that remain.

But I thought that the risk of inflation was receding?

[OnlyMe]

Inflation has been rampant. If certain parties handn't lied about it for so long long we'd collective have seen the warning signs earlier and been able to act earlier.

[Smurf1976]

It's worse than even I thought. And I've been fully expecting this since the early 1990's (and first became aware of the problem in 1988).

If there is now a problem with using (refined) oil products faster than the UK infrastructure can supply them, regardless of global availability, then once the oil supply reaches crisis point and tanks are physically empty then gas demand can only go back UP. But gas demand is already higher than the supply can cope with.

So in short the UK faces an energy trap with no way out for the country as a whole. The only way out for anyone is to have a very large stockpile of fuel or switch to their own private (off grid) renewable sources and/or massively improve efficiency. But it simply isn't practical for more than a very small fraction of consumers to do that within the available time. Industry isn't set up to produce the necessary items in sufficient volume for a start and with the debt situation consumers aren't in a good position to invest in them.

Not a good situation. If you're going to invest in a ground source heat pump etc. then get in now before the waiting list starts. It will take a DECADE or more to fit such devices to every building and the majority caught in the queue will either pay for oil/gas or go cold. Likewise buying an efficient car etc.

[Blue Peter]

It's worse than even I thought. And I've been fully expecting this since the early 1990's (and first became aware of the problem in 1988).

If there is now a problem with using (refined) oil products faster than the UK infrastructure can supply them, regardless of global availability, then once the oil supply reaches crisis point and tanks are physically empty then gas demand can only go back UP. But gas demand is already higher than the supply can cope with.

So in short the UK faces an energy trap with no way out for the country as a whole. The only way out for anyone is to have a very large stockpile of fuel or switch to their own private (off grid) renewable sources and/or massively improve efficiency. But it simply isn't practical for more than a very small fraction of consumers to do that within the available time. Industry isn't set up to produce the necessary items in sufficient volume for a start and with the debt situation consumers aren't in a good position to invest in them.

Not a good situation. If you're going to invest in a ground source heat pump etc. then get in now before the waiting list starts. It will take a DECADE or more to fit such devices to every building and the majority caught in the queue will either pay for oil/gas or go cold. Likewise buying an efficient car etc.

I believe that we are due a new gas pipeline from the continent in 2007-ish, plus improved LNG facilities, so I think that as far as gas is concerned (all other things being equal), it is getting through this winter and next winter. We are then increasingly dependent upon Russian gas, until that starts to become a problem,

Peter.

[right_freds_dead]

i dont think they asked nicely enough.

they should again propose a price freeze, only this time say pretty please.

with bells on top.

[Smurf1976]

I believe that we are due a new gas pipeline from the continent in 2007-ish, plus improved LNG facilities, so I think that as far as gas is concerned (all other things being equal), it is getting through this winter and next winter. We are then increasingly dependent upon Russian gas, until that starts to become a problem,

Peter.

Short term agreed that the problem is about this winter and next. No dispute there.

But longer term depending on Russian gas is little different to depending on a single supplier for any other commodity. At some point the price goes up an supply security becomes an issue. When that day comes, and it will, it is too late to do anything other than face the consequences. With the oil situation, that is unlikely to be a viable backup at the time.

So the time to plan is now...

[Blue Peter]

Short term agreed that the problem is about this winter and next. No dispute there.

But longer term depending on Russian gas is little different to depending on a single supplier for any other commodity. At some point the price goes up an supply security becomes an issue. When that day comes, and it will, it is too late to do anything other than face the consequences. With the oil situation, that is unlikely to be a viable backup at the time.

So the time to plan is now...

I very much agree. Indeed, the time to plan is about 10 years ago

I thought that perhaps your original post was a little too pessimistic, since it seemed to imply that this was the end for gas, whereas I think that we've got a second gasp on it. Still, we have to use the time wisely, and the precedent for that is not good,

Peter.

Edited January 6, 2006 by Blue Peter

[stillill]

"An organisation representing the National Health Service, Tesco and other top companies has called for a moratorium on further rises in gas and electricity prices.

The Major Energy Users' Council (MEUC) urged utilities such as British Gas to hold back plans to further increase bills and instead work cooperatively with "shell-shocked" customers.

Andrew Bainbridge, director general of the MEUC, said: "We need a moratorium because our members are already shell-shocked by a series of price rises and there is no way they are going to be able to claw back the extra costs.

"Further price increases will force companies out of business and suppliers must work in partnership with their customers through this difficult period."

Wither the free market indeed.

Haven't these dimwits heard of energy futures? If they were the "top companies" they think they are, they'd be trading futures to offset any increase in the price of their raw materials.

Our economy is obviously in safe hands!

[El_Pirata]

Wither the free market indeed.

Haven't these dimwits heard of energy futures? If they were the "top companies" they think they are, they'd be trading futures to offset any increase in the price of their raw materials.

Our economy is obviously in safe hands!

Some do not have the credit lines needed to cover the margin calls on big futures positions.

I don't think a behemoth like Tesco has any excuse though!

[munro]

Wither the free market indeed.

Haven't these dimwits heard of energy futures? If they were the "top companies" they think they are, they'd be trading futures to offset any increase in the price of their raw materials.

Our economy is obviously in safe hands!

How long could they do that for? And if they did tie up money this way, on what would presumably be a speculative punt, how would they respond to their shareholders, or the NAO if they're a govt body, if the punt didn't come off? And if they did tie up large amounts of money this way, might they not be undercut in the short term by a competitor who didn't hedge and took the risk? Seems to be much more complex than you're allowing.

ElP, you seem very knowledgable about these things, I'd be interested to know more about how this works.

[El_Pirata]

How long could they do that for? And if they did tie up money this way, on what would presumably be a speculative punt, how would they respond to their shareholders, or the NAO if they're a govt body, if the punt didn't come off? And if they did tie up large amounts of money this way, might they not be undercut in the short term by a competitor who didn't hedge and took the risk? Seems to be much more complex than you're allowing.

ElP, you seem very knowledgable about these things, I'd be interested to know more about how this works.

It's not a speculative punt in theory, if you can take and "equal and opposite" position to your physical oil needs, that way you just lock in a future price. In fact it's the opposite of speculation. Say that in August you will need to buy 100,000 barrels of Brent crude - that means you are currently short 100,000 barrels. So you buy 100,000 barrels of August futures (go long by 100,000) at $60/bl, now you are neutral. You do not gain by either a rising or falling market. In in August the price of oil has risen $10, you have to pay $10/bl more for you physical barrels, but you sell you futures at a $10/bl profit, so you still end up paying $60/bl for your oil. And if the price falls, you make a loss on your futures position but you pay less for you physical oil.

That's all well and good in theory, but futures are a very blunt instrument, and in practice you won't be buying Brent crude, you'll be buying something else. This opens you up to

"basis risk" - you could lose $10/bl on your futures, but not make back that whole $10 on your physical position because the price of what you are actually buying (ie another crude rather than Brent, or petrol or diesel) did not change by the same amount Brent did. To properly hedge this requires the use of over-the-counter instruments and some quite complex trading activity. And then there is the issue of how exactly a company like Tesco works out what its energy exposure is. It's a lot of effort. At the end of the day, it is not an area they want to get into I think.

The you have the shareholders. Hedging can be a lose-lose situation when you have to report to them. You hear people talking about "hedging losses" without taking into account the fact there was a gain on the other side, while if price fall they want to know why you are paying more for your supplies than your unhedged competitors.

[stillill]

At the end of the day, it is not an area they want to get into I think.

The you have the shareholders. Hedging can be a lose-lose situation when you have to report to them. You hear people talking about "hedging losses" without taking into account the fact there was a gain on the other side, while if price fall they want to know why you are paying more for your supplies than your unhedged competitors.

I agree it's a bit of a departure from their core business, but if that's the way the world's economy is going they better get on board. I know BT started trading copper futures when the price for their cabling started going through the roof, so it's not unheard of.

[munro]

Thanks - point taken that's it not speculative in theory. But in practice it looks like you will only be able to hedge over a fairly short timescale, if you can find someone prepared to offer you a suitable option, but rising energy costs are still going to feed through. Hedging will only delay them a bit. And it's hard to see how it's going to work if every big company has to employ a specialist team of analysts and traders to do this; ok, they may place their trades with somebody, but they'll still need some staff who will presumably need to be au fait with trading, options, financial derivatices, risk, etc etc. Who's going to pay for this? Of course some companies will profit, in some years, but others will lose.

BT may be able to do this with copper but are you (stillill) suggesting that big companies should do this on a regular basis across a whole range of activities?

[Smurf1976]

Oil up again. $64.20 at the moment.

[FTBagain]

Oil up again. $64.20 at the moment.

This is beginning to look like another strong move up a la the start of last year.

[FTBagain]

Wither the free market indeed.

I wouldn't worry about the free market. British Gas and the others are not going to go to the wall just because Tescos and co. do not fancy their input costs rising.

British Gas and the other energy companies have been holding off passing on all of the fuel price rises, hoping they would drop. They would have done that knowing that to pass the prices on would hurt their customers (Tesco et la), ultimately damaging the market, which in turn is not good for their own longer term profitability. So they have taken a bit of a short term hit in expectation of the situation improving in the longer term.

They now realise that it is indeed different this time. This is a demand led price rise, not a supply manipulation or interruption as in previous damaging oil price spikes. More than that demand is still rising very fast (China and India), which means that there is no chance of the prices coming down any time soon. Indeed they will go up and the energy industry has already served notice that is will be the case in 2006.

Oil inflation is starting to feed through the system. However, I think these companies (Tesco et la) will cut costs before they put up prices. So Unemployment will make the first move up. The data supports this thesis as Unemployment is already moving up. A housing market correction always accompanies rising Unemployment.

This rise in Unemployment is only small, but there are indications that it is accelerating, and could accelerate faster over the coming months. That will bring on the HPC later this year IMO as job security starts to weeken and the feel good factor fades.