IT TOOK just a few days of frost to push the spot gas price to silly levels of more than £1 per therm, three times that at the beginning of November. Such prices are not just too high for comfort, but too high for business. Manufacturers who use gas as a feedstock or a primary fuel source are beginning to down tools.
This isn’t market economics at work but business politics. There is no acute shortage of gas, gas storage facilities are not empty and the recently expanded UK-Belgium Interconnector is operating smoothly, even if custom is infrequent.
Nor is this a curious blip — the within-day gas spot price reached 115p per therm on Monday, but moaning manufacturers couldn’t be blamed for failing to buy price protection in the futures market. Gas for delivery in January cost 93p per therm on Monday and if you wanted to hedge your postion for the first quarter of 2007 you would still have to pay 76p. Meanwhile, the Dutch spot price is 50p and German utilities are paying about 40p for gas under long-term contract from Norway’s giant Troll field.
The easy conclusion is that Britain’s short-term deregulated gas market isn’t working. The more interesting question is why — and the answer lies in the failure of those who deregulated Britain’s gas market to recognise that all markets eventually go global and North Sea gas was Britain’s holiday, not its pension.
Just as Lenin wanted to build socialism in one country, Britain sought to build a free deregulated energy market in a single European state. It was a less vainglorious ambition, but no less futile. The British daydream of a sheltered market of perfectly priced megawatt hours is ending as fast as the hydrocarbon molecules are sucked out of the depleting North Sea reservoirs. From the gas glut of the mid-1990s, we have moved to the tyranny of the marginal molecule.
The extra tranche of fuel that tips the market balance from nagging hunger to satiety must now come from abroad, but, unfortunately, abroad they play a different game. While Britain was smashing its utilities into fragments, the gas monopolies of the Continent were building themselves up and investing abroad. Unlike in the UK, they have retained ownership of their pipelines and grids, controlling both supply and distribution. The European Commission can cajole and threaten, but as long as ownership is maintained, there is little incentive for any utility to run a free market in pipeline capacity.
If Britons are shut out of Europe’s gas pipeline network, the question remains why don’t continental utilities step into the breach, ship gas to Britain through their own pipes and pocket a handsome profit?
British manufacturers suspect hanky-panky — gas being diverted away from Britain to push prices even higher. The reality is more prosaic and more frustrating: politics governs the behaviour of continental utilities, not the profit motive. What Europe’s mega-utilities fear most is a loss of control in their domestic markets, the base of their power and huge cashflows. For one such as Gaz de France, the diversion of marginal gas supplies to Britain would be unthinkable. It would create a tighter domestic market and higher prices, leading to consumer dissatisfaction, questions from politicians and, ultimately, calls for greater competition — a disaster.
Pipeline monopolies are making Britain’s fuel expensive, but a very different problem is emerging in liquefied natural gas (LNG), where the market is working too well. Cargoes of LNG are beginning to arrive at National Grid’s new terminal at the Isle of Grain. It can accomodate a vessel a week, but, despite very high forward gas prices and widespread predictions of a winter shortage, BP and its Algerian partner have sent only four ships to Britain since the summer.
BP has been diverting cargoes to the United States, where LNG has been selling at a premium. It is difficult to complain; BP can hardly be criticised for chasing a high American gas price. It’s how a free market is supposed to operate — commodities flow to the highest bidder.
There is no easy solution; Malcolm Wicks, the Energy Minister, can thump the table at the EU Energy Council next month, but even if the Commission were minded to wave its stick, legal action against the monopolies could take years.
We thought we were clever dismantling British Gas, replacing the lumbering giant with a score of small but cunning gas shippers, fighting for customers. No one imagined that they would end up fighting giants for access to gas.
Bittersweet reforms
AS THE world trade talks juggernaut skids into a ditch, the European Commission is busy cobbling together a watered-down reform proposal for its sugar regime, the original reforms having been comprehensively rejected by a core group of states keen to protect an industry that produces sugar at a cost three times the world market price.
Sugar is one of the most offensive programmes in the Common Agricultural Policy — a regime that encourages farmers in Ireland to produce sugar from beet under cloudy skies. In order to compete, the European Union farmer gets protective quotas and the EU even pays an export subsidy to dump surplus sugar on the world market. Still, the Commission is pandering with the offer of an extra €2 billion in compensation for EU sugar barons and a longer transition for the introduction of lower prices.
Meanwhile, the Fair Trade lobby is bemoaning the end of the EU’s protective regime for Caribbean and African cane sugar farmers. They will struggle when Brazil’s giant cane plantations muscle their way into Europe.
What do the Fair Trade lobbyists expect? Commodities are a game for high volume, energy-intensive producers. It is foolish to pretend that African or Caribbean smallholders can compete. Instead, they need to find niche markets where they can add value. More aid will do them no favours.
carl.mortished@thetimes.co.uk
