THERE has been considerable discussion about the high price of oil and gas. Accordingly, I should like to clarify a few points on the operation of the wholesale market and how it impacts on the delivered price to the customer, industrial (including commercial) and the domestic markets.

Is there a shortage of oil and gas is the begging question. I suggest the answer is: No; there just may not be an abundance.

All of the delivered prices for oil and gas, the price the customer, industrial or domestic, pay, is determined, over and above the fixed cost of delivery, by the variation in the Wholesale Price of these commodities.

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Before retiring I worked for one of the major gas suppliers to the Industrial and Domestic Markets. I was involved in selling gas to large industrial customers, the companies who bought gas at the wholesale market price. Accordingly, I have an understanding of how the wholesale market operates which I would like to explain below and illustrate how and why these large energy producers are making a huge profit at the expense of the final customer.

Firstly, I am using the term “producer” to apply to the oil and gas companies who are bringing the energy ashore.

The wholesale energy market is essentially a “commodity market”. Therefore, like all other commodities it is open to manipulation, supposed supply/demand, rumour on availability, false information, and “speculation”.

Now, if you are an oil or gas supplier who has already secured wellhead oil or gas at the “discovered price” – years before – then you are only using the wholesale price to vary your profits. If you are a supplier who relies totally on purchasing on the wholesale market then you are exposed to the vagaries of the speculative market.

From the time of the discovery of oil and gas fields in the North Sea to the time it is piped ashore it takes about five years. Therefore the economics of a field is determined by the wholesale price at that time. For example if Brent Crude (the wholesale marker price for oil in the UK and Europe) five years ago was $40/barrel and is now around $84 then that is a straight profit of $44 with no increase in cost.

Adding to the volatility of the situation, large banks with trading houses are speculating on the energy market, like any other commodity. They will speculate within the day on the variation on the wholesale market, buying and selling within the market to make a profit on the price changes.

I suggest it is not in the interest of the oil majors, producers, shippers, wellhead owners and trading houses and also the Russian trans-European pipeline shippers/producers, for there to be a drop in the wholesale price.

Now looking at the downstream effect. Industrial customers pay back to back with the wholesale market. If they have secured a fixed price for, say two years ahead then, depending on when the price was agreed, then they may have short term security. If they are “floating” on the market the situation may be different. However, high energy prices in this sector can only have end result of an increase in the cost of goods.

The domestic market is a different kettle of fish. The public has nowhere to go to offset the rising cost of energy, they have to absorb it or freeze. If you are supplied by one of the long term established energy suppliers - the companies who now constitute “the suppliers of last resort” if your supplier has failed – then as an existing customer you may be more fortunate in the meantime, as you may be linked a longer term contract backed by advance purchase of futures gas or legacy “wellhead gas”. Customers transferred from failed suppliers will not be as fortunate and are likely to be exposed to the full extent of the wholesale market.

We have already had over 25 suppliers in the domestic market go “bust”. Energy prices across the board are interrelated. An increase in one drags up the others, as commodities. Gas makes the balance of electricity generation. Therefore gas is the marginal price that determines the final price of electricity.

The UK Government is responsible for energy policy. They have allowed this wholesale free market to “rip”. What are they going to do about it. Let people freeze? Let energy costs create inflation?

The UK Government should take the adverse effect of energy speculation out of the market – it is in their power to politically arrange for the “Taps” to be opened slightly and create the positive message that there is no shortage of supply. I will “put my money where my mouth is” and suggest the wholesale price will then come down.

Stewart Dickson

Skirling By Biggar