Energy Companies Prices and Costs 2013 / 2014

How do Eon, SSE and the rest of the big six energy companies justify higher gas and electricity prices when their costs are falling?

9th. December 2013

Between October and December 2013, the big six energy companies have announced price rises for gas and electricity averaging 9.1%. As usual we are being told that it is increases in wholesale prices are responsible for this.

There are several as yet unanswered questions where these wholesale prices are concerned though. For example the average benchmark price of a barrel of crude oil in July this year was $105 and the pound/dollar rate $1.48. In November the price had fallen to $95 a barrel while the exchange rate had improved to $1.63.

This means that the landed UK cost for a barrel of crude oil on which we are told wholesale prices for both gas and electricity depend have fallen from £70.80 to £58.11 - A reduction of 18%.

A common argument by way of explantion for price increases in the past has been the rising cost of  the "forward" price of oil and the value of the pound against the dollar (oil and gas are always priced in dollars) and not the current (spot) prices.

However in an article of 10th December 2013 in the Saudi Gazette that is usually extremely well informed on the oil business, details of a report by the commodities research department of Deutsche Bank AG was published. This included the following findings:

“Rampant US oil supply growth and upside risks to Libyan and Iranian crude oil exports imply a bearish environment for global crude oil markets next year .....We see the growing risk of an oil supply glut developing.”

The article went on to cite that analysts at BNP Paribas SA and Citigroup Inc. had separately arrived at similar conclusions.

The expectation according to these findings is that current oil prices are expected to fall another 10% throughout 2014 and beyond. At the time of writing the UK£ / US$ ninety day forward exchange rate has barely moved from the current rate of $1.63 to $1.625.

November's price rises therefore appear to be in direct contradiction to what we are being told by the energy providers. The question that arises therefore is why? If it is profiteerring why isn't Ofgen or the OFT urgently investigating them or if it is something else, why isn't the government telling us?

In the case of one of the majors; EON who increased their prices for electricity by 11.4% (25% up for the year as a whole) and gas by 18.1% last month, increased "investment" cannot be the answer. Their latest accounts show total assets falling from €153 billion in 2011 to €140 billion in 2012.

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