It’s the oil, stupid! It’s the taxes, stupid! Because it’s running out, stupid!
Actually it’s a little more complicated than that. Let’s start at the beginning – your bill.
You cannot have failed to notice that your energy bills are getting more and more expensive as each year goes by – and you are right, your energy bill has gone up!
In fact, your bill hasn’t just ‘gone up’ – if your bill was the Space Shuttle it would be on the edge of the Milky Way by now. Just take a look at the graph below:
You’ll see two lines:
- The green one is the actual annual cost of a representative tariff of someone using 40,000 kWh of gas & electricity. What the blue line tells you is that back in 2003 you would have paid £1,068 to fuel your property. Fast forward 10 years and that bill has more than doubled! Come rain or shine, boom or bust, the trend is pointing in one direction only… up.
- Now, let’s move on to the purple line. That is what a hypothetical bill would look like if the same tariff had gone up in line with the rate of inflation as expressed by the Consumer Price Index (CPI).
- Based on the CPI you would have been paying about £1,200 for your energy in 2012. Instead, it was almost £2,500
Energy is expensive. What else is new?
The question you should be asking yourself is – “if inflation isn’t driving the price upward, then what is?”
That’s where things get “interesting.” Let’s run through the various theories…
Gas & Electricity are natural commodities – and they’re running out
Gas is pumped out of our Earth, and electricity is mostly generated using a mix of fossil fuels like coal, oil and gas. Once we’ve used it, it’s gone. The perception that we’re using up a finite resource is driving up the price (supply and demand, anyone?)
Again, all of this is true.
But for this to explain a doubling in price, wouldn’t we have had to either double our consumption or halve our production of fossil fuels? The fact is that four out of the last ten years were market by a biting recession, which has slowed down our production of goods and services and in turn reduced our consumption of energy.
At the same time, the technology to find and extract fossil fuels from the ground has massively improved – so we’re pumping more oil and gas than ever before out of the ground. And while no one is really sure how much is left, the popular consensus is that we have consumed less than half of the available fossil fuel resources.
So if supply and demand were the only price-setting factors then we should have seen a much smaller price increase, more in line with our purple friend, CPI. Yet we’ve been hammered with a far greater increase than that. So who else can we blame?
War, what is it good for?
High energy prices typically coincide with conflict – and we’ve been involved in a few of those lately.
For example, it is a fact that one of the latest cycles of rising energy prices began with the September 11th, 2001 tragedy. The invasion of Afghanistan, the war in Iraq, the Libyan uprising, the Iranian crisis, and the Syrian situation are all measure events in oil price history.
Conflict in or near oil-rich countries threatens the supply of energy to the energy-poor industrial nations and the perception of risk drives up price.
Markets translate risk into higher price, we all know that. But by this much?
As a matter of fact, we’re abundantly supplied with energy and have been throughout any of the above mentioned conflicts. That these conflicts are responsible for doubling our energy prices? This is just too far-fetched to be acceptable.
Who to blame
The same goes for your energy. Energy does not follow the rate of inflation. Energy is inflation.
There’s an argument which states that China’s economic growth is leading to heightened competition amongst nations for natural resources.
The theory is that China’s voracious appetite for primary energy sources is sucking in oil and coal at an increasing rate, and that is driving up prices for everyone.
It’s definitely true that China is consuming vastly more energy than it did before it set off on its incredible economic growth trajectory – even more so that it has now become the world’s largest consumer of electricity (even ahead of the United States!)
But then again, if the laws of supply and demand come into play why has increase in Chinese consumption not been offset by the fact that energy consumption overall has decreased in the West as a result of recession and a conscious drive for energy efficiency?
Has Chinese demand really meant that there is now less energy for us to heat our homes? We don’t think so!
So it’s not China’s fault. Can we blame Russia?
After all, we have experienced several winters where a billing dispute between Russia and its neighbour Ukraine temporarily threatened to shut down a critical gas pipeline. Each time they had an argument we saw sever short-term wholesale gas prices shoot through the roof – even here in the UK where we don’t use the natural gas piped from Russia.
But these are temporary problems where all the players involved have a real interest in finding long-term solutions. The Germans for example, built a whole new pipeline through the Baltic Sea to transport gas around the Ukraine.
All Russia is responsible for is a few short-term supply crises, which quite simply cannot serve as an explanation for our ten-year pricing trend.
Oil is the most important ingredient of the world’s energy mix (black gold). The price of oil is therefore a guide price for any other type of energy, including gas and electricity.
OPEC represent the leading producers of oil. OPEC does not want to sell its oil cheaply (as it did throughout most of the 90s when the price was as low as $15 a barrel). But OPEC gets nervous when the price of oil goes too high, for that might choke off the oil-dependent economies of countries that need their product – and then who’ll buy the stuff?
OPEC members quite literally work together as a cartel to increase or decrease oil supply, with significant implications on price. So is it their fault? Have they cut supply and caused ten years’ worth of spikes in energy prices?
Considering that the historical average price of a barrel of oil is close to $25 and that the actual current price is north of $55 (and reached highs of $100 in 2012), one might be led to believe that this is exactly what they’ve done; OPEC has grabbed us by the short and curlies and they’re squeezing us hard in our hour of need!
OPEC have been known to drive up the price of oil by cutting production. But production have stayed constant or increased pretty consistently for the last four or five years. It was only at the end of 2016 when the member states economies were becoming crippled by the losses (see Saudi Arabia) that this changed.
So we do know one thing: the price of your energy is linked to the high price of oil. BUT it’s not OPEC’s fault. Not this time.
Our last chance to find a poster boy for blame… The argument that taxes at home are the reason our bills are going through the roof, and there is some tender meat on the bones of this argument.
Governments tend not to raise income tax rates because people don’t like it and given a chance will vote them out of office. Enter, the stealth tax.
The typical way to get money in the door is by using the backdoor. The UK government has charged the big energy suppliers to execute on its own long-term energy commitments, whether they be renewable energy targets, make the national energy infrastructure more efficient, insulating the country’s housing stock, reducing carbon emissions, increasing generation capacity, broadening the energy fuel mix to include more environmentally friendly fuels, P272 or compulsory smart meter roll-outs. The government has effectively charged energy suppliers with making it all happen – so the cost of these projects is shared by all UK energy consumers through collective billing surcharges.
Sounds convincing, but doubts remain because these surcharges are not shown as separate line items on our bill so we can’t make up our own mind and choose whether to believe it or not.
In the absence of transparency, UK consumers should be excused for choosing to remain sceptical.
Your bill is the sum of its parts
Scepticism is perhaps the word to bring things to their natural conclusion.
All the arguments brought together have contributed to the final, perhaps most powerful reason as to why energy prices are going up: energy prices are going up because consumers’ expectations have been conditioned that way.
The energy utility is industry is totally unique in how it is able to justify price increases (see above).
What’s the point? Well, if you can name another industry that has so many excuses at the ready when it comes to explaining the exorbitantly high cost of its product – yet at the same time never appears to be quite transparent enough to seem believable – then we’d love to hear it!
Think about your mobile phone bill in 2006, and what is it now? If you’re lucky, it might be just about the same. Except now you’ve got a swish smart phone that is infinitely more capable than the brick you had to carry around 10 years ago – so the service you get is better!
Somewhere along the line, the energy utility companies have managed our expectations downward; prices go up but the service remains the same.
Real change is possible
But it needs you!
Not enough business customers switch their energy suppliers to force the current situation to change. Yet pro-active consumers who review and switch frequently are the lifeblood of a truly competitive energy market. It’s what enables new suppliers to come into the market, improves competition and service, drives innovation and ultimate results in a better deal for everyone.