oil prices below $50 a barrel!! still no price cut!!

AstarothCY

Summary of a recent Energy Supply Probe by OfGem
Full report

Hedging and the wholesale - retail link
1.22. We have examined how changes in wholesale gas and electricity prices are passed through to consumers by the Big 6 suppliers. There is clear evidence of a lag between changes in wholesale and retail prices. This is largely the result of suppliers' hedging of their wholesale market exposures, and to a lesser degree the effect of administrative lags. We have found no evidence that this lag is greater when prices are falling than when they are rising, although this is unavoidably based on relatively limited historical data in relation to falling prices. We will monitor price changes over the coming months, during which wholesale prices are likely to remain volatile.

1.23. There is evidence that the Big 6 suppliers seek to benchmark their hedging
strategies5 against each other in order to minimise the risk of their wholesale costs
diverging materially from the competition. Whilst this is an understandable risk
management strategy, we are concerned that hedging may not be adequately driven by the risk preferences of consumers.

More to the point,

7.17. Figure 7.3 shows a much closer relationship between movements in wholesale
energy costs and changes in retail prices. It shows that both wholesale cost increases
and decreases tend to be passed through to retail prices with a lag. As a result, the
spread between wholesale and retail prices typically narrows at times of rising
wholesale prices (as suppliers delay the pass through of higher wholesale costs into
retail prices) and widens at times of falling wholesale prices. It is not clear from
these figures that there is a systematic tendency for this lag to be longer at times of
falling wholesale prices or vice versa. However, we note the limitation of this analysis
given the short duration of data used and the fact that there was only one short
period of sustained falling wholesale prices in this six year period.

7.20. We have also undertaken econometric analysis on the relationship between
wholesale costs and retail prices. The key conclusions from this analysis are as
follows:
�� There is a long-run relationship between wholesale costs and retail prices based
on this model of wholesale purchasing strategy, i.e. firms do pass through
changes in wholesale costs to retail prices.
�� It is difficult to quantify the extent of pass through with much precision.
Estimates of pass-through range between 59 and 168 per cent depending on the
model.
�� The evidence on whether firms tend to pass through wholesale costs to a greater
extent when prices rise as compared to when they fall is inconclusive, as the
period for which we can construct a representative wholesale cost series only
contains a limited period with price falls.

Figure 7.3, which the first part refers to, is on pages 76-77 of the full report. I urge you to go see it, because it pretty much shows that the responsiveness lag is about 1-2 months.

Yes, the data is inconclusive, but if you were to ask the person who wrote that paragraph to comment on the current situation, they would surely comment that retail prices should have responded to wholesale prices by now, and that February is definitely giving them way too much time to respond given historical data.

KimYeovil

I trust that if a company broke the 'cartel' and, with gas they bought and budgeted to sell at 3.3p, they started to sell it at 2.5p all the moaners would remain loyal four months later when the other companies exhausted their old stock were able to sell new supplies at 2.2p? Or would you 'forget' and switch again? Thought so.

(Hmm. Not sure on which side that argument falls.)

1carminestocky

Have certain members opened the Harveys Bristol Cream early or summat?

KimYeovil

You'd be the first to complain if a company tried to safeguard 'breaking rank' by implementing a leaving charge.

1carminestocky

Hic! :beer:

SwanJon

Sorry, couldn't resist.

AstarothCY wrote: »

I very much doubt that British Gas bought 9 months' worth of oil back in July. That would be absolutely moronic of them, and I know they aren't stupid because they've managed to rob us blind these past couple of months.

What would British Gas do with 9 months worth of oil anyway?

And if you have been 'robbed' go to the police. I'm sure they will take the violence (actual or threatened) very seriously indeed.
Or are you using emotional language to further your point?
This is (mainly) a sensible subject, but as soon as you start throwing in stuff like that it rapidly becomes a tabloid slanging match.

There is very little we (consumers or employees) can do about the price - only really make sure you are on the best tariff for you and are as energy efficient as you can be. If everyone who is left on the host supplier's standard tariff chose the best deal for them, that would probably have a bigger effect that 15 petition's, or a few hundered letters to MPs.
Intertia is the biggest stunmbling block we have, but there's very little we can do. Energy is getting loads of publicity at the moment, but how much of it is directed towards getting the best deal now, and how much of it is making a big noise for the sake of making a big noise.

Companies exist to make money - hit them there.

mech_2

AstarothCY wrote: »

Figure 7.3, which the first part refers to, is on pages 76-77 of the full report. I urge you to go see it, because it pretty much shows that the responsiveness lag is about 1-2 months.

No it doesn't. The scale on the x axis is in units of 3 months, not 1 month. Two ticks on the scale is 6 months.

They are using an 18 month hedging model where all the gas for 12 months is traded ahead of time. How on Earth could that mean a 1 to 2 month lag? Read the text, don't just glance at the pictures.

Yes, the data is inconclusive, but if you were to ask the person who wrote that paragraph to comment on the current situation, they would surely comment that retail prices should have responded to wholesale prices by now, and that February is definitely giving them way too much time to respond given historical data.

Erm, no. That's your opinion. Blatantly trying to pass it off as someone else's opinion doesn't make it any more correct or authoritative.

BallandChain

The scale on the x axis is in units of 3 months, not 1 month. Two ticks on the scale is 6 months.

Is there a graph to back that up Mech?

AstarothCY

mech wrote: »

No it doesn't. The scale on the x axis is in units of 3 months, not 1 month. Two ticks on the scale is 6 months.

They are using an 18 month hedging model where all the gas for 12 months is traded ahead of time. How on Earth could that mean a 1 to 2 month lag? Read the text, don't just glance at the pictures.

You're right, I misinterpreted the graph. My mistake. It does seem that their response lag is about 6 months, so we wouldn't expect price reductions before February, essentially. As for the hedging, that's not tied to wholesale prices really. I don't know how that works but it's probably quite complex. The question was what was the lag between wholesale and retail prices and the answer is 6 months.

I guess I was wrong in some of the things I said, but we shall see what sort of action the government and Ofgem take to ensure that energy companies don't figure out some trick (such as changing over their entire pricing scheme for no apparent reason) to avoid it. Also, let's not forget that it's not just how long it takes them to lower prices, but by how much they lower prices. You'll notice that the Dec 07 low point in wholesale prices wasn't actually passed on to retail prices. In fact, the relationship kind of breaks down around June 07.

I'll reserve judgement for now then, and I'll admit I was to some extent wrong, but it's certainly not all nice and rosy for the energy companies.

mech_2

AstarothCY wrote: »

You're right, I misinterpreted the graph. My mistake. It does seem that their response lag is about 6 months, so we wouldn't expect price reductions before February, essentially. As for the hedging, that's not tied to wholesale prices really. I don't know how that works but it's probably quite complex. The question was what was the lag between wholesale and retail prices and the answer is 6 months.

First of all I apologise for being harsh in my previous post. I have got so used to respondents ignoring or ridiculing any reasoning I put forward that I didn't consider that you might have an open mind.

As for the lag between retail energy prices and wholesale prices, I suspect the utilitiy companies actually look to oil as a benchmark of what gas prices will do.

Plotting a graph of retail gas prices against the oil spot price actually shows a closer correlation than comparisons with gas wholesale prices and it shows a 7 to 8 month lag. That makes price drops seem still further off, but with the rhetoric flying around at the moment I think rather than following a formula, retail prices may be pushed to fall as soon as the utilities can afford it. I think that's probably not further away than early February. Though that's a guess and I could always be being over-optimistically wrong.

I guess I was wrong in some of the things I said, but we shall see what sort of action the government and Ofgem take to ensure that energy companies don't figure out some trick (such as changing over their entire pricing scheme for no apparent reason) to avoid it. Also, let's not forget that it's not just how long it takes them to lower prices, but by how much they lower prices. You'll notice that the Dec 07 low point in wholesale prices wasn't actually passed on to retail prices. In fact, the relationship kind of breaks down around June 07.

That could be because the relationship between gas wholesale prices and oil broke down at the beginning of 2007 and the utility companies didn't know when it would correct itself. Wholesale gas was around 15p/therm cheaper than expected for all of 2007. The utility companies pocketed the difference at the beginning of the year before some reluctant price reductions. If you look at the profits for British Gas in the first half of 2007 it was a huge figure and they were comparitively cheap compared, so I imagine there were the same kinds of profits at the other companies (though I haven't checked). The mood of the public is such that I don't think that will be allowed to happen this time.

I'll reserve judgement for now then, and I'll admit I was to some extent wrong, but it's certainly not all nice and rosy for the energy companies.

Indeed.