What’s happening to UK gas prices? Brief commentary, short memories

It wasn’t far into my role at the then Department for Trade and Industry that natural gas prices in the UK rose sharply, causing alarm and bemusement. I had started in 2004 and, heading into the 2005/6 winter, things were starting to change (see chart). Having enjoyed well-supplied natural gas markets due to production from the UK Continental Shelf, the UK was moving from a natural gas exporter to an importer, especially in the winter. This in turn meant that, in order to attract the required amount of fuel from the European continent (which had much larger gas storage capacity), prices had to rise.

From what I recall, this came as a bit of a shock to not just large consumers of gas, such as power generators and industry, but also policy makers and the media. Weren’t liberalised energy markets supposed to keep prices down? Was someone manipulating the market, pushing prices up? What was going on in Russia, in the European gas market, and the global markets for LNG (liquefied natural gas)? Why did all those markets suddenly have an impact on the UK? Was some butterfly flapping its wings in Australia?

I won’t go into all that history, other than to note that, from what I was able to tell back then, prices were simply being set by supply and demand. [I recall creating a quick model that predicted daily prices — obviously with hindsight — with remarkable accuracy.] I haven’t analysed today’s gas markets in detail, but would hazard a guess that those, too, are being driven by supply and demand — with any murkier explanations being relatively unlikely.

So why all the outcry? Well, I’m going to be a little uncharitable for once, since I don’t recall similar media articles compalining last year that prices were unusually low. [Imaginary headline in June 2020: “Consumers forced to save money on energy bills as gas prices plummet to a 10 year low.”] It seems to be the case — and I realise there is nothing novel about saying this — that we humans just want to have our cake and eat it. Liberalised, competitive markets when it suits us, and regulation, price caps and intervention when it doesn’t.

This isn’t going to be the last time people will need to be reminded that “prices can go up as well as down”. Somehow I’m not looking forward to what happens if interest rates go up to curb inflation. Then, too, I will be the annoying person reminding everyone that few consumers were complaining about the low interest rates they’ve enjoyed for more than ten years. [Imaginary headine in June 2021: “Mortgage holders confused as pay growth outstrips interest payments.”]