Shale Gas 2008
Fixed prices from IBG energy consultants
- Published on 18 December 2008
Something strange is happening, not for the first time and certainly not for the last, in energy markets.
Many SME end-users, have been con(vinc)ed into going for long term (one year and up) prices by what we call IBG energy consultants. IBG stands for what happens when the end user starts looking at their price a little bit more closely, and especially when they see that prices for their competitors are collapsing but remain fixed for them; IBG = I'll Be Gone. Even worse, IBG sometimes even stands for internal buyers.
SME's often make the wrong energy choices because they start off knowing little or nothing about energy, and if they then get advised by the majority of Third Party Introducers they rarely end any the wiser, although often poorer.
Two basic energy fallacies are that volume (how much you buy) is important and a fixed price is safer.
Gas and electricity are traded, fungible commodities. If an SME is smart they pay an index commodity price, fixed and transparent supply charges that are identical from all suppliers and a margin. The margin can be variable with your size, but even a small user should get away with five per cent or less. Your business would go bust at those margins, but suppliers don't: they have the benefit of massive demand, scalable systems and a lot of customers far less informed than you are who really pay through the nose.
But not a lot of people know this. They think that buying gas is like buying paper clips: The more you buy the less you pay. More importantly they forget completely about the key impact on price: it's not how much you buy, it's when you buy. Supply is important: Demand is more important.
So, gas (and by extension power) cost more when demand is greatest, and not so much when demand is less. Gas is made even more complex by the geological fact that it is produced at a fairly even rate, but we won't go there right now.
A gas price is made up of a strip of monthly prices that generally reflect the demand reality that January is expensive and July is cheap(er). Or that's the way things should work. But lately a one year price is the same as December's day ahead price. Why pay the same rate for April, July or October as during a peak month. And a peak month price based on the coldest December in 30 years? That's even nuttier.
The only logical reason why next year gas prices are the same as today, or higher in some cases, would be if there was a sudden explosion of demand based on a rapid economic expansion which fed into oil prices.
It would be an interesting problem to have, but how likely is that scenario?