UK Natural Gas Prices Turn Negative

Theoreticians of the market like to say that markets are efficient at the production and distributing goods and services. That is not entirely true. Markets are good at weeding out unsuccessful efforts at production and distribution. As an example, the UK has such a glut of natural gas that the spot price for a therm of natural gas actually reached -5p yesterday. That is, traders were paying to get rid of it.

Now, natural gas is not a negative value commodity; that is, possessing it doesn't make one worse off. One can use it for all sorts of things, from heating buildings to fertilizing fields. However, Britain’s gas storage capacity is 96% full. The two reasons for this are the usual culprits: supply and demand. More specifically, the weather has been mild and is expected to stay that way, and a new pipeline delivering gas from Norway just opened.

This doesn’t mean that prices consumers will pay are going to drop right away; markets aren’t that perfect anywhere. In order to protect themselves from sudden price rises, a great many UK energy companies hedge their supply costs by paying a fixed rate in advance. This is wise because it makes costs predictable, and in markets with rising prices, it saves money. When prices plummet, though, the deal holds, and they pay more than the market rate for gas. If the gas company is paying a high price, that will get passed on to the consumer. Some believe the price of gas will dip in the spring so gas bills will stay high despite -5p a therm.

This ridiculously low price will abate soon. The £5.5 billion, 746-mile long Langeled pipeline is currently running tests at full capacity, meaning more than the usual amount of gas is arriving in the UK. After the test, the supply entering the country will decline. And no matter how mild the weather, November in the UK just isn’t as warm as August.

Because the UK’s supplies of indigenous natural gas are declining, indeed, some say approaching exhaustion, imports are important. The Norwegian pipeline is a significant development that will keep Britain in gas for the next generation or so. Long term, it means prices won’t soar so much as rise gently. Short term, though, markets went hay-wire because of it. Still, no “efficient” system would charge 5p to get rid of something as useful as natural gas.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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