Gas is an international commodity, but we can control the price of our own production

That the voters have little or no idea how our energy sector works is hardly surprising when journalists and politicians don’t understand it either.

Gas is a commodity which internationally is priced in an almost perfect market. That price is at the intersection of the supply and demand curves. If, as at present, supply is constrained whilst demand is constant then the price goes up. Our Gas supply sector (retail) takes its product at international prices. It has no alternative.

The pricing realities for Gas in Britain would be the same whoever owns the retail sector. After the botched privatisation of thirty years ago we have a multitude of private sector gas retailers who compete on the margin by offering largely synthetic pricing deals to customers. None of these “suppliers” has a significant strategic or acquisition cost advantage over the others. The competition is largely artificial .

Taking private sector retailers into public ownership and creating a single publicly owned supply entity would eliminate the phoney retail competition but it would have no effect on international prices at all. Economies of scale could reduce local costs and eliminating marketing costs would also be beneficial. But these benefits, though measurable, pale into insignificance compared with the effect of changes to international (wholesale) prices.

Back in the 1970s the world had to adjust to a huge increase in oil prices taking the price of refined products to unprecedented levels. Similar forces are at work now with Natural Gas. It’s supply driven. In the 1980s prices fell back as supply increased and again this is paralleled today. If supply from Russia returns then oil and gas prices should fall again.

Let me return to the specific situation we have with gas in the U.K. Fifty percent of our consumption is from indigenous resources, mostly from production from British waters offshore. The producers (see above) include multinationals like Total, BP and Shell and some independents like Harbour Energy – the largest producer of all. The suggestion in some quarters that these companies could be nationalised is laughable and can be ignored. But other actions are feasible.

These producers price their output at the market price I referred to above. Hence when the sell it to the retailers that’s the price the latter have to pay. The graph showing the price of Gas from the Netherlands above is illustrative. The recent rise mainly caused by shortages of Russian gas since April is clear. However although traditionally domestic output in the U.K. has been priced at international prices in fact it doesn’t have to be. It’s our gas !

There is nothing to stop the U.K. Government paying U.K. producers a lower price for their gas. For example a price similar to that in Summer 2021 before the massive world price escalation (see graph). Remember producers were perfectly content with their receipts in 2021 and have done nothing to justify the serendipitous windfall profits they have made over the last year.

Obviously there is nothing we can do about the price of gas for the 50% we import. But for our home produced 50% there certainly is. Set that at a much lower level and reduce retail prices in line. The producers would complain of course, it would in effect be a windfall profits tax. But it would be a positive move in times of high inflation and stress.