Aug 4, 2022·edited Aug 4, 2022Liked by James O'Malley
It's worth saying that medium term subsidies are likely to force prices up even higher.
The whole reason the prices are going up is because there are too many users of gas chasing not enough gas. Prices are going up until enough people are priced out of using gas that the usage matches the supply.
If you subsidise gas, then all you do is outbid other people, pushing the price up more. This is what has happened in the UK housing market - more and more money (including various government subsidies) chasing the same number of houses.
Now, initially, that will mean that UK gas users will outbid other European gas users. Which probably leads to first other European countries subsdising their gas consumers, pushing the price up even more, and secondly, poorer European countries running out of money to do so and people in those countries getting cut off from gas/electricity and then freezing.
This is a large part of why the medium-term price predictions are so in flux; the more subsidy various countries put up, the more money there is chasing what is, ultimately, the same amount of gas. The predictions are not predictions of supply and demand, but of how much subsidy European countries are prepared to pay.
The medium-term solution is to get enough gas onto the market that the price can drop and the OPEC gas suppliers (Qatar, mostly) start making their normally obscene levels of profit instead of super-duper-mega-obscene levels of profit.
Free market theory says that the increases in price should spur speculators to start drilling for gas in places where it will be quite expensive to produce: but most of the world's gas is in one of three places: The Gulf, where it is controlled by a handful of authoritarian governments who are not increasing production because they can make enormous profits instead, Russia, who has already cut us off, and the USA, where speculators got burned by the last two times they responded to a price rise by overbuilding gas wells and the price dropped off a cliff.
I suspect that the answer is to do something that goes against just about everyone's instincts: guarantee a gas price floor for, say, five years which is somewhat above the 2021 prices, but well below current ones. That means that the UK, in coordination with EU countries, would agree to buy an amount of gas equal to UK/EU 2020 consumption each year until, say, 2027 at a fixed price floor; any gas sold (to consumers) at a price higher than the floor would be deducted from the guaranteed amount. Government would then resell that gas onto the market at the market price, taking a loss once the market price drops below the guarantee price.
That would give investors in new gas wells some security that they will be able to sell their gas at a profit in 2025 and 2026 even if Russia turns the taps back on or Qatar decides to build a new LNG terminal and export twice as much gas every year or whatever crashes the price. If they start losing money in 2028, then they would have had five years of profit, and they can presumably ensure that they have paid back their investors in those five years.
This would create a lot of fracking in the medium term and would result, by 2026 or so, in there being too much gas (which might mean needing to just burn it off once all of the storage is full), which sounds awful. But it's essentially promising gas companies a profit for producing gas no-one needs in 2026-7 in exchange for ensuring there is enough gas in 2023-4.
My bet is that, with russia's actions pushing the west to move off fossil fuels more quickly (for security's sake), the OPEC nations will see that the end of resources they were hoarding to last the next few decades (until the world previously might have taken to massively cut use) may have a lot less time before it becomes more niche. Hopefully that will incentivise them to increase their production and make/keep it more affordable, else they risk people/countries just taking the economic hits already by adopting other options. Those countries are already working hard to pivot their wealthy economies away from oil *reliance* but that doesn't mean they want to be left holding vast oil reserves in a single generation's time, when they could instead have extracted some healthy revenues for it already.
This doesn't go down well in most stories about the energy crisis but if you self describe as white collar above average you can help yourself by choosing a different path. EVs, PV and heatpumps. It's not an easy solution and it only helps you but it is an answer.
I've been thinking a lot recently about how the governemnt should deal with the present and next few years of price regulation for consumers. I don't think the energy cap works as it doesn't respond quickly enough to movements in the market which has caused the removal of most of the competion to the big five. In the long term, this reduces competition and consumer choice.
The cap was brought in to try and protect consumers, especially the poorest. I think the solution is to remove the price cap, remove standing charges and make the first 5Kwh of electricity useage each day free.
The remaining units of electricity would then have to be charged much higher in order to pay for the standing charge and the free units. Same would go for gas.
This would incentivise reduction in energy usage, but still allow a minimum that everyone can access. Maybe 5Kwh is too small, maybe it needs to be based on numbers of people in a household too - but I think something along these lines would help.
It's worth saying that medium term subsidies are likely to force prices up even higher.
The whole reason the prices are going up is because there are too many users of gas chasing not enough gas. Prices are going up until enough people are priced out of using gas that the usage matches the supply.
If you subsidise gas, then all you do is outbid other people, pushing the price up more. This is what has happened in the UK housing market - more and more money (including various government subsidies) chasing the same number of houses.
Now, initially, that will mean that UK gas users will outbid other European gas users. Which probably leads to first other European countries subsdising their gas consumers, pushing the price up even more, and secondly, poorer European countries running out of money to do so and people in those countries getting cut off from gas/electricity and then freezing.
This is a large part of why the medium-term price predictions are so in flux; the more subsidy various countries put up, the more money there is chasing what is, ultimately, the same amount of gas. The predictions are not predictions of supply and demand, but of how much subsidy European countries are prepared to pay.
The medium-term solution is to get enough gas onto the market that the price can drop and the OPEC gas suppliers (Qatar, mostly) start making their normally obscene levels of profit instead of super-duper-mega-obscene levels of profit.
Free market theory says that the increases in price should spur speculators to start drilling for gas in places where it will be quite expensive to produce: but most of the world's gas is in one of three places: The Gulf, where it is controlled by a handful of authoritarian governments who are not increasing production because they can make enormous profits instead, Russia, who has already cut us off, and the USA, where speculators got burned by the last two times they responded to a price rise by overbuilding gas wells and the price dropped off a cliff.
I suspect that the answer is to do something that goes against just about everyone's instincts: guarantee a gas price floor for, say, five years which is somewhat above the 2021 prices, but well below current ones. That means that the UK, in coordination with EU countries, would agree to buy an amount of gas equal to UK/EU 2020 consumption each year until, say, 2027 at a fixed price floor; any gas sold (to consumers) at a price higher than the floor would be deducted from the guaranteed amount. Government would then resell that gas onto the market at the market price, taking a loss once the market price drops below the guarantee price.
That would give investors in new gas wells some security that they will be able to sell their gas at a profit in 2025 and 2026 even if Russia turns the taps back on or Qatar decides to build a new LNG terminal and export twice as much gas every year or whatever crashes the price. If they start losing money in 2028, then they would have had five years of profit, and they can presumably ensure that they have paid back their investors in those five years.
This would create a lot of fracking in the medium term and would result, by 2026 or so, in there being too much gas (which might mean needing to just burn it off once all of the storage is full), which sounds awful. But it's essentially promising gas companies a profit for producing gas no-one needs in 2026-7 in exchange for ensuring there is enough gas in 2023-4.
My bet is that, with russia's actions pushing the west to move off fossil fuels more quickly (for security's sake), the OPEC nations will see that the end of resources they were hoarding to last the next few decades (until the world previously might have taken to massively cut use) may have a lot less time before it becomes more niche. Hopefully that will incentivise them to increase their production and make/keep it more affordable, else they risk people/countries just taking the economic hits already by adopting other options. Those countries are already working hard to pivot their wealthy economies away from oil *reliance* but that doesn't mean they want to be left holding vast oil reserves in a single generation's time, when they could instead have extracted some healthy revenues for it already.
This doesn't go down well in most stories about the energy crisis but if you self describe as white collar above average you can help yourself by choosing a different path. EVs, PV and heatpumps. It's not an easy solution and it only helps you but it is an answer.
I've been thinking a lot recently about how the governemnt should deal with the present and next few years of price regulation for consumers. I don't think the energy cap works as it doesn't respond quickly enough to movements in the market which has caused the removal of most of the competion to the big five. In the long term, this reduces competition and consumer choice.
The cap was brought in to try and protect consumers, especially the poorest. I think the solution is to remove the price cap, remove standing charges and make the first 5Kwh of electricity useage each day free.
The remaining units of electricity would then have to be charged much higher in order to pay for the standing charge and the free units. Same would go for gas.
This would incentivise reduction in energy usage, but still allow a minimum that everyone can access. Maybe 5Kwh is too small, maybe it needs to be based on numbers of people in a household too - but I think something along these lines would help.