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Wednesday, 25 September 2013

Do the math, Miliband

The combined profits of the big 6 UK energy companies last year was £3.75 billion which is supposed to be a lot, but consider the following:

The average dual fuel bill last year was £1,420, and there are 26.4 million households so that works out at £37.488 billion of domestic fuel sales.  Of course not all of those energy sales were domestic.  We still have some industry and of course a lot of those sales were to government owned institutions such as schools, hospitals, the military and  government offices, so let us guess that only half of the profits were related to domestic sales, so that is profits of £1.85 billion on sales of £37.5 billion, or profits equal to 5% of sales.

Now consider the cost of the fuel, mostly gas.  Britain has had some of the cheapest gas in Europe because of the North Sea, and in fact at the moment it has the cheapest n Europe on average, and nearly half the cost of gas in Germany, but the difference is diminishing rapidly because North Sea gas production has been declining rapidly and we have had to import much more from Norway, from the Middle East via LNG carriers and from Siberia or Algeria via very long pipelines, all of which are much more expensive options than buying the gas that lies on our doorstep.

Why is that?

Because all the other suppliers always have the choice of selling to the rest of the world at the prevailing spot price delivered less delivery costs, and UK gas will always be sold at a price of world spot price delivered to the world market less delivery costs. In other words if a quantity Russian gas delivered to Germany costs 100 delivered, and it costs 20 to ship/pump the same quantity from the UK to Germany, then UK suppliers will happily sell to the UK market for 80 + a small bit.

On the other had if it costs 10 to ship from Norway to the UK and 25 to ship from Norway to Germany, the Norwegians will happily sell to the UK at 85+.

On the other other hand the Qataris will sell to the UK and Germany at about the same price because they bring their gas in by LNG and the Russians will probably charge the UK a bit more because the cost of shipping from Russia is higher to the Uk than from Germany.

So UK gas gives us cheap gas, but it is running out and the average wholesale price paid for gas is rising rapidly as more is imported, which is why average wholesale fuel prices have been rising at more than 10%.

So that in six months the likely rise in fuel prices (6/12 of 10%+ is probably greater than 5%) will wipe out most or perhaps all of the energy companies' profits, and a further 14 months retail price freeze will have them trading at a loss or going out of business.

Well done Miliband mi.  No idea what they teach on a PPE course but it doesn't seem to be Politics or Economics.  Must be a lot of Philosophy.

1 comment:

Demetrius said...

This blog really upset me. As a paid up member of the The Philosophical Society whatever Miliband is, he certainly is not a philosopher. Shahman or snake oil salesman maybe or even comic turn at a pinch but not what you suggest.