Energy costs

Bunny2923

Hi I'm new to the forum so apologies if I have posted to the wrong area.

I wanted to ask why energy prices to the consumer are still increasing when the gas and oil prices are down to around pre war levels 

I would have attached a link to trading economics which shows the prices of gas oil etc to support this but I wasn't allowed.



Regards

CliveOfIndia

There are many reasons, but probably one of the main ones is to do with futures trading.  Energy suppliers don't go out and buy their energy from the producers every week, like you would a tin of baked beans from Tesco.  They negotiate with the producers and agree to buy x amount of oil (or gas, or whatever) at £y per barrel in a year's time.  So they're locked into the price they agreed many months/years ago.

There are many other factors, of course, but futures is a major element.

spot1034

You might have asked the opposite question eighteen months or so ago when there were clear signs that prices would be going up - including an early warning from St Martin of Lewis who spotted the rises in the wholesale market and advised his followers to get on to a decent fix whilst they still had the chance - and there was then a quite protracted period over the winter of 2021/22 where prices were held at well below wholesale costs by the Ofgem price cap, and thirty smaller suppliers went bust. We now hear the accusation that 'they' were very quick to put prices up, but in fact that was not the case. 

EssexHebridean

Martin's discussed this on his podcast a few times - most recently last week if I remember rightly. Well worth going back to listen for a clear explanation.

vic_sf49

Thanks @CliveOfIndia, I had no clue of how/when they bought our energy. 

CliveOfIndia

vic_sf49 said:

Thanks @CliveOfIndia, I had no clue of how/when they bought our energy. 

In fact, futures trading is a massive activity for traders, financial institutions etc.  Did you ever see the film "Trading Places"?  Futures are used for all sorts of commodities - a common one is farming.  A farmer will often set a price for buying animal feed, fertiliser etc. at a fixed price in the future, and likewise will agree to sell his potatoes to Tesco at a fixed price in the future when they're ready to harvest.  This gives the farmer some control over his cashflow, as he knows how much his animal feed is going to cost, and how much per ton he'll get for his potatoes.

The gamble is, what's the prevailing price when the time comes to sell his potatoes?  If he's agreed to sell for £100 a ton, and the prevailing price come sale time is £80 a ton (because the weather has been perfect and there's a bumper crop), he's laughing and Tesco takes a hit.  But if the prevailing price is £120 a ton due to a poor harvest and a scarcity of potatoes, then the opposite is true.

And the big banks, traders etc. do this all the time, whether it's potatoes, oil, any commodity, even though they never actually take possession of the goods.  To use the potato analogy, they hope that they will always get it right, buy the potatoes at £100 a ton (the price they agreed) then immediately sell them for £120 a ton (the prevailing price at harvest time).  It's quite a complicated business, and as I say is done with all sorts of commodities.  And the traders can make or lose millions/hundreds of millions of pounds depending on the outcome of their bet.