How not to run an Economy:
Utilities and Resources
Rising dependence on gas and ballooning prices are not a path towards a sustainable energy policy
There's so much hot air being produced about natural gas in the UK at the moment that it all seems a bit of a blur. One week the government is
touting the benefits of natural gas for long-term sustainable energy production, and the next it is expressing disappointment that domestic
bills from the private energy companies have gone up by around 10%. Again. There appears to be a huge contradiction in this position, and it is
one which demonstrates a number of deep running threads through our current ideology which is very seldom articulated.
That the UK is so dependent on gas goes all the way back to North Sea discoveries in the 1970s. Cheap gas meant we could heat and power our
homes economically without having to rely on the heavily unionised coal miners who were getting a bit unruly. Having dispatched the coal miners
Thatcher saw the rump nationalised gas company as ripe for privatisation, which came in 1986. Fast forward 26 years and British Gas has been
joined in competition by another 5 companies, two of which are German, one French and one Spanish. The UK has also become more dependent on
imports of gas since domestic production peaked in 2000 - last year imports made up 53 of the 80 billion cubic metres (bcm) of gas consumed in
the UK, although it should be noted that 15 bcm was also exported to Belgium and Ireland in one of those anomalies of globalisation. Imported gas
traditional comes in pipelines from Norway or Holland, but last year liquid natural gas from Qatar suddenly became a big player for the first time
and we have to ask ourselves how long it will be until we too become fuel-reliant on the Middle East and Russia. I can't imagine anyone voting for
that but it would seem an obvious destination.
And yet almost two thirds of our total primary energy use in the UK comes from natural gas. We use it to cook, to heat our houses, to produce
our electricity (at 40% it is the largest single primary energy source for electricity production in the UK). In September 2012 the government
announced 20 new gas-fired power stations, so we'll become ever more dependent on this flammable air. That we'll have to import it is no problem
- in the free market it's possible to buy anything for the right price, even if that price is increasing at 10% a year, virtually guaranteeing
healthy returns for shareholders. The streamlined and publicly-floated British Gas increased its annual profits by 23% in the first half of 2012.
That we've been given the idea this morning that the gas companies have been fixing prices between themselves should come as no surprise, and I
will not comment or the veracity of such claims until they are proven or otherwise. However I'd like to look at what they are accused of and how that
state of affairs was made possible - it's an improbable story. The gas companies are alleged to have followed the techniques of the big banks uncovered
in the recent libor scandal, which mostly involved lying to ratings agencies over the telephone. There is a perception of free-market pricing which
relies on the markets to come to the correct price of a good through fundamentals of supply and demand. Natural gas is traded extensively on New York's
NYMEX and on the multi-national ICE (Intercontinental Exchange), yet all of this transparent trading activity accounts for maybe 20% of the total volume
in natural gas trading. The rest is done 'Over-the-Counter', meaning directly between trading companies or banks without declaring the trade to anyone -
especially not the regulators.
In 1936 the US government reacted to the overwhelming evidence of price-fixing and manipulation of commodities prices from financial speculation
by passing the Commodity Exchange Act, obliging all trades in basic raw materials - food, extracted metals and fuels - to take place on open
transparent exchanges, so that market prices would become public knowledge. Since that time the many interested parties have lobbied, fought and
befriended those in power to work on the repeal of that law. In doing so the lobbyists quoted economic theorists like Friedman and Fama when they
argued that markets are inherently efficient and that the best way to ensure that efficiency was to take out all governance and regulation. After all,
the bankers and the traders were the professionals and they could do their jobs better than everyone else - hence the ego-sized bonuses they receive
every year. The interested parties held a lot of sway but it was only with his final act as president that Bill Clinton finally consigned the 1936 act
to history with the 2000 Commodities Futures Modernization Act. The act was similar to the situation that already existed in the UK and allowed trading
to become invisible. The question remained unanswered however, as to how traders would know what price to pay for various commodities if trades were being
made in secret. This is where the pricing agencies come in - it is companies like Platts and Argus Media that speak to traders regularly and provide their
prices on a semi-public basis to whoever pays for it. It was to these sorts of agencies that the large energy companies are accused of lying, and it could
be an expensive mistake - Barclays banks were fined $200 million for their role in libor-setting - although given their track record the energy companies
will most likely try to pass on any fines to their customers.
The stock answer to concerns expressed about gas is that 'the Shale will save us'. Shale gas is a new technique for extracting gas trapped in highly
compressed sand (shale) up to 3000 metres (10,000 feet) below the Earth's surface. It involves passing high pressure water laced with a variety of chemicals
into the layer of sand to fracture the rock and allow the gas to be released. That safety concerns have included the presence of flammable 'drinking water'
infused with natural gas has had little effect - the US has ramped up production so much that in 2010 it accounted for 20% all domestic natural gas supplies
(from less than 1% in 2000) and this is predicted to rise to 46% by 2035. Being deep under the ground makes it virtually impossible to estimate supplies of
this gas and the amount of subsidies required to make this gas competitive on the free market is also unclear. What is certain is that billions of dollars
have already been pumped into the ground during the development of shale gas technology. In the UK hydraulic fracing for shale gas remains
controversial and the first pilot project near to Blackpool is currently suspended pending safety assessments. Furthermore geological surveys have not found
anything like the amount of gas seen in the US or China. It would appear premature at best to base future energy policy on a fuel with questionable sourcing
option, but that is the case here.
The privatisation of utilities such as electricity and energy suppliers has resulted in an extra level of complexity for governments who are trying to form
sustainable energy policies while also ensuring short-term profits for the companies involved. Fair pricing of these commodities is further complicated by
the instance of major players to buy directly 'Over-the-Counter' from suppliers and other traders. Regulation is being passed in both the US in the form
of the Dodd-frank Wall Street Reform Act and in Europe under the acronym MiFID II to force transparency on financial trades and to close
some loopholes, while governments and the press have been playing a growing, long-awaited role in identifying and prosecuting financial fraud. The model
of privatised utilities companies, however, is one which deserves scrutiny, especially when this same ideology is being preached to the bankrupt and
impoverished as a way of improving efficiency in these services. While we're at it, maybe we could also redefine efficiency as being the best solution for
all involved, not just a pseudonym for profit maximisation.
Adam R. Mathews, Berlin
13 November 2012
This article is the latest in the series How not to run an economy
Further reading and sources:
Mathews A.R, The impact of Excessive Speculation on Commodity Market Prices [PDF], Utrecht University, October 2012
Macalister T., FSA examines whistleblower's claims of 'Libor-like' manipulation in gas prices, The Guardian, 12 November 2012
BBC News, British Gas raises gas and electricity prices, 12 October 2012
Gloystein H., UK overseas gas imports to surge to $11 billion by 2015, 19 September 2012
Carrington D. & Doward J., Huge scale of UK's 'dash for gas' revealed, The Observer, 3 November 2012
MacLeay I., Harris K. & Annut A., Digest of United Kingdom Energy Statistics 2012 [PDF], A National Statistics publication, London, 2012
Associated Press, Decades of federal dollars helped fuel gas boom, 24 September 2012
How not to run an Economy
"What choice do we have?" It's a common refrain these days; while the economic cracks in the system
have been proliferating and widening, the explanations are generally seen as incomplete, and the solutions as little more than useless.
In order to build a better economy and reform the system, we need a better understanding of the fundamental causes of the pickle we find
ourselves in. This series addresses a number of such topics, including governments' favouring of big over small enterprises and the increased
financialisation, largely through debt, of our world. The aim is to create an awareness whereby precise solutions can be proposed and worked
upon, because answering the question 'what can we do?' cannot be done in a single two line soundbite.
This fourth article in the series looks at the effects of privatisation of public utilities and deregulation of energy markets.
Also in the series
Part 5: Industrial Rise and Decline
The Black Country led the world into industrial prowess and then economic decline - what does it tell us about today's world?
Part 3: Growth and Debt
To cover our huge debts we have to grow our economies, but for how long will that be physically possible?
Part 2: Government as a Corporation
When financial markets become a measure of the well-being of an economy, what are the consequences in the real world?
Part 1: Ownership
How does the ownership of our most powerful companies affect our communities and our economy as a whole?
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