The gas price – what’s behind it?
The gas price paid by domestic customers has been very volatile since the advent of full competition ten years ago. Initially the gas price fell, reaching a low point in 2000 after which it remained steady. In 2004 the domestic gas price began an upward trend which accelerated. Between 2003 and 2006, the retail gas price rose by more than 50%. Consumers saw a welcome fall in their gas price in 2007. However, in the space of just one year (2008) the gas price rose by over 40%.
So what’s behind these changes in gas price? Inevitably the gas price paid by customers is linked to the costs of gas suppliers. Suppliers costs are dominated by their purchase costs – which are determined, ultimately, by the wholesale gas price. The wholesale gas price is the price that very large quantities of natural gas are exchanged. Since the start of large scale extraction of natural gas from beneath the North Sea in the early 1970s, the gas price in the UK has been related to the cost of extracting gas from thousands of feet below the sea-bed and delivering it to homes in the UK. In the early days, because the body responsible for buying all gas from North Sea and selling it to customers was a government-owned monopoly (the Gas Council), the gas price was set centrally and, although cost reflective, could be used as a tool of social policy. The creation of competition in the 1990s revealed that the wholesale market was oversupplied and the wholesale gas price collapsed. Domestic customers saw the benefit of this low wholesale gas price when gas supply was open to full competition in the latter half of the 1990s, and households saw their gas price fall steadily until 2000.
The completion of the gas pipeline between England and continental Europe (which has a higher gas price) saw large quantities of gas flow out from the UK to the continent. This had the effect of reducing the North Sea of gas more quickly and bringing the UK gas price into line with that of continental Europe. With UK gas reserves now rapidly depleting, the UK will soon be importing the majority of the gas we need, and as a reult our gas price will be determined by the European gas price. The European gas price is, in turn, linked to the price of oil – because most wholesale gas imports to Europe have their gas price indexed to the global price of oil. With oil prices reaching historic highs in 2008, the UK’s wholesale gas price, and therefore the gas price that customers pay, also rose to unprecedented levels.
