The "energy price cap" is forecast to rise by almost half as much again in the autumn. This article explains why.
A little investigation reveals this about the price cap:
Ofgem bases the price cap on how much it would cost a typical energy supplier to provide energy for an average home. It uses a raft of factors which impact upon energy bills in its calculations, as well as considering usage levels and market data across a given period. Wholesale gas and electricity costs for suppliers and the network costs they have to pay, such as infrastructure, are key factors. Ofgem also considers the operating costs and profit margin of suppliers.
However, the price of oil and gas bears no relation to the cost of their production, as their prices fluctuate even when there is no change in the input costs. Thus oil and gas are priced entirely according to what the market will bear. From this we can deduce that the that the bases on which Ofgem sets the price cap are entirely specious, except the last one.
As a thought experiment, what would happen if everyone stopped using oil and gas? We don't have to think too hard, we can just look back to 2020 and see that the price went through the floor. So if everyone decided that the energy companies were charging too much and refused to buy oil or gas, it would become considerably cheaper.
Basically, the price cap is adjusted so that the energy suppliers, who buy on the spot market, where the price is set by speculators, can continue in business. The alternative, that the price is controlled so that the profits of the cartel are contained, is never considered. Hell, the cartel would rather have a windfall tax on their profits than that, which should tell you something.
Tuesday, 24 May 2022
Price cap bollocks
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18 comments:
Shhh. Don't mention Pfizer.
Who's profits are bigger, Shell or Pfisser?
So who's windfall profits shall we not tax?
Because Shell's product is not going to kill us.
And we know what is in it.
'Speculators' are a Good Thing. They take the slack out of markets and provide a 'price insurance' service to producers like farmers.
But, where you have squillions of USD/GBP/Whatever of bad money at the wrong price such useful speculation becomes financialised. And that's yer problem. Nationalised money, again.
MW. Agreed. All the 'raft of factors' is never enough information (as Hayek and 'pretence of knowledge'). All that Offgem can actually see are those margins. They are the synthesis of market prices plus some wedge for the supplier.
L, this was Bayard's post, not mine.
B, to summarise my view (which is hopefully quite similar to yours).
1. For important goods that are relatively freely traded, the speculators are not doing any harm, they are a side show.
2. The 'suppliers' are just middlemen. As long as people can switch freely between them, then their profits are earned fair and square and shouldn't be taxed at high rates.
3. It is oil and gas extractors who are making super profits (or super losses in the bad times).
4. Therefore they are the ones who should be subject to windfall taxes.
5. Clearly, the UK govt can easily apply these to north sea and other UK-based extraction activities (not sure about foreign producers).
6. Best kind of windfall tax is a permanent windfall tax.
Govt has to haggle a bit. Let's say it costs $40/barrel to get the stuff out of the ground and back to a pumping station or refinery. And let's say a fair mark up is $10 = $50.
So govt says, OK, if selling price is $50 or less, no tax on that. If price is more than $50, the tax is 80% (or whatever) of the excess.
All a bit rough and ready, but oil and gas extractors will get used to it. If the break even price is $50, they are doing OK. If price is $100, they pay $40 tax and are still making nice profits, no incentive to stop pumping it out.
5. Best
MW.
Oops
So, really the WT becomes a sort of LVT - essentially you are trying to tax the 'economic rent'? Which is what I was trying to say.
L, yes! Only ever tax the rent element. Oil and gas companies are welcome to make a decent normal return on their highly risky but socially valuable activities. Anything over that is rent.
MW. But, 'bureaucrats' and politicians must not enforce 'rent capture' rules on normal price movements that provide market signal - which they are won't to do. As today, high energy prices are signals (in part) that supply is a bit scarcer and therefore consumers need to economise or substitute. Some of that 'high price' is also due to other government failures like green taxes etc. So somehow we have to have a formula that bureaucrats can apply without any discretion.
L: "So somehow we have to have a formula that bureaucrats can apply without any discretion."
Clearly, I made up the figures of $40 and $10. That's up to govt and oil industry to haggle over. Oil people will exaggerate costs and want higher base line untaxed amount; govt should be very skeptical and haggle down. But whether right or wrong, for both parties, those are known numbers to be reviewed or indexed periodically.
As to price movements, so what? If oil co invests on the basis that they can make a profit if price is $50 or higher, then they are happy. If price goes up to $100, they are still making $10 real profit, tax free, and pay super tax on the other $50 windfall.
Let's assume super-tax rate is 80%.
They are hardly going to shut down a well at $100.
They are still making as much after tax as they would be making if price were $60 (and there were no super tax). They wouldn't shut down at $60 (with no super tax) so why would they shut down at $100 (with a super tax)?
As to consumers, they will be paying the $100 either way and have same incentive to economise.
a. Oil co's want to expand volume, as long as they cover their costs + margin. This takes time and massive investment, years or decades. they don't care where in the world thy do it.
b. It's only gits like OPEC who deliberately restrict supply short term to maintain prices.
The former a. is good competitive behaviour and to be welcomed. The latter b. is manipulation and theft.
" So if everyone decided that the energy companies were charging too much and refused to buy oil or gas,.."
Please Sir, me Sir, I know.
We'd all freeze to death so there'd be nobody to buy oil or gas and the price would go down. Job done.
Frank, did we all freeze to death in 2020? Well, I'm still here, how about you?
"2. The 'suppliers' are just middlemen. As long as people can switch freely between them, then their profits are earned fair and square and shouldn't be taxed at high rates."
What the government is saying, is we have to put the cap up, because the suppliers will go bust, i.e. they are the human shield protecting the extractors.
It's amazing how the government wants us to believe that Russia will be sufficiently inconvenienced by having to switch from selling their oil and gas to western Europe to selling it to the rest of the world to call off their military adventure in Ukraine and yet the oil and gas extractors won't think twice about not selling the UK any of their products if the UK refuses to pay their inflated prices.
MW @ 25/May 16.59. Yup. Precisely.. So the $64,000 question - how do we get the buggers - the pols and bureaucrats - to do that sensible thing?
B: "the oil and gas extractors won't think twice about not selling the UK any of their products if the UK refuses to pay their inflated prices"
That is exactly what they will do. It is a question of buying power.
The UK itself is not a big enough market. I suggested long ago that the whole of Europe should club together, taking as many peripheral countries with it as possible, and say to Putin "OK, it costs you $40 to extract oil, we would like a fixed price of $60 for the next twenty years. Take it or leave it."
If two-thirds of his customers signed up to this, it might just stick.
MW. Shades of UK Foreign Policy for the last 500 years - here https://www.youtube.com/watch?v=qXLbeg8gO4Y Now operated by Putin
L, I meant pretty much the opposite. We the UK should throw in our lot with other European countries (and anybody else who wants to tag along) and tell Putin, $60, take it or leave it.
We are European and our interests are largely aligned with those of other European countries. In or out of the stupid EU makes no difference.
"We the UK should throw in our lot with other European countries (and anybody else who wants to tag along) and tell Putin, $60, take it or leave it."
Which would be a much more effective "sanction" than simply to refuse to buy the stuff. Russia is inconvenienced, we are convenienced, win win, instead of the other way around, which is what the pols are actually doing.
MW I know what you meant. I was looking at things from Putin's point of view and that clip seemed amusingly apposite.
Monopsonies Rule OK!
Actually, whilst on that kick, 'people' do not appreciate that markets exist to benefit consumers not producers. Generally, it's consumers who make the buying decision as to whether or not to do the exchange. Us poor producers are at the beck and call of consumers.
We are victims! It's not fair! I demand protection!
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