You dare not blaspheme the market.

They’re at it again, it’s the market stupid. Is the market stupid? Well patently, yes and that’s the very least of its problems according to those who know.

We in “the West” have been brought up on the markets, In the US it’s the Bible and the Markets.
Markets are free right? Free markets. What did Americans all want when they were subjects of her Majesty? Freedom, that’s what. Well now they have it and they took to it like a duck to water.

Freedom I always argue over a beer in the hotel bar in the US, doesn’t really exist. One person’s freedom is another’s obligation. For one to have a lot of freedom another must suffer a lot of obligations. That’s how it always worked. The Monarchy were free, you were not. Their freedoms were your obligations. Now the top 0.1% by wealth are free, you are not.
You have to know when to bid good night.

So what does this have to do with free markets? Well, I hate to be the guy who repeats himself, but the guys with the freedom need a lot of guys with obligations or they can’t be free. A Free Market is where you swap these around and keep things under control. Keep people under control.

What is a gas market?

A place where people sell you something you or someone like you actually owns? Well sort of.
Yes, we humans do own the earth’s resources, and nobody ever did, or ever can give ownership of them to somebody else, but its more complex. People paid good money for licenses to explore and extract and others to build equipment and pipelines, so these people are entitled to a return on their investment and hard work.
The thing you are probably complaining about is that no steps were taken to ensure they couldn’t deprive individuals and businesses of supplies, or squeeze us all for huge margins, thus causing recessions and terrible pain for helpless people.

Let’s explain these markets in very simple language. There are markets for all sort of commodities and contracts such as CFDs etc, Gas is a relatively new area for this and because it is new, like other markets before it, it is corrupt according to many and not functioning very efficiently.

These markets are not places where farmers take chickens and sell them to consumers. The only thing sold is contracts. Contracts to buy (puts), contracts to sell (shorts). If I sell a short, I agree to sell you a unit of gas (about 1000 therms) on a given date at an agreed price. I do this because I expect the price will fall sharply and a supplier will be thrilled to buy my contract and use it to get a better price for his produce. Confusing isn’t it.
To make this simpler, I could have bought a CFD that’s a Contract For Difference. In that case we only have to consider how much I expect it to fall in price and how much it actually does and we settle up. There’s no likelihood for example that I’d have to take delivery of a great tankful of gas.

Is this how my gas supplier buys gas?

No, it is not how British Gas or whoever, does their business. The gas is sold via long term contracts up to several years at fixed prices as any logical person would expect it to be. Governments and huge PLCs are not so foolish as to be trading in this manner with their responsibilities. The gas flowing into national grid today was mostly ordered years ago at a fixed price and has not suddenly shot up.

The purpose of these markets for a National supplier is to fill gaps in need. They always need to buy a little more than the long-term contract and a lot of their electricity is produce using gas also. Anything from 2 to 15 % I’m told is the amount they need to buy via spot markets.

What is a free market and how does it work.

The answer has changed dramatically in recent years. As we already established little or no product changes hands as a result, the most thing that happens is that the price goes up and down and different people on different days pay different prices.
Economists will tell you that a markets job is to pool information and facilitate finding the optimum price based on supply and demand inputs. Initially it was about how much was on offer today and how many buyers were in the building. Now its more about rumours of how much will be available next week and how much demand there will be.

So it’s about information?
Well not really. You see there is precious little information. Nobody actually knows. Traders gossip and mostly its about animal emotions; fear and greed, Bulls and Bears. There’s another word I could use but I’d be banned from the platform
Information, were there much of any use and indeed were there anybody in the game able to make much use of it, would be easy to collect, analyse and distribute in a world where we not only are masters of big data and small data and data analysis and data lakes and swamps and even A bloody I. The enemy is in fact, little boys with little toys and far too much freedom.

The information, what little of it there is, is provided at a substantial fee by a publisher operating as a PRA. That stands for |Price Reporting Agency. Their indexes provide the basis from which trading ( a sort of disorganised haggling) happens and most importantly, these indices are used for many long-term supply contracts.

“But whereas it is simple at any time of the day or night to check a publicly quoted company’s exact value by looking up its share price, deciding the true value of gas contracts in the opaque OTC market is much harder. To do so you must subscribe to data from a handful of specialist agencies which make a calculation based on incomplete evidence. “ The Guardian

This disorganised mess is how the wholesale price of your gas was set months or yeas ago. Did I mention that British people own the gas under their country? What’s the point.

Did I mention that retail suppliers have seen their profits increase up to 300% already and the biggest gains have yet to b reported?

What is wrong with markets?

Don’t worry, I’m not tackling that at a broad level. For the purpose of taking gas form the earth beneath Britain and placing it in the homes of the citizens who rightfully own it, such a convoluted mess as I just outlined can only be described as obscene.
There’s a set annual need in UK that can be estimated within a few %age points and meeting that demand including hedging a few variations is so simple as to not warrant discussion.
Agreeing a fair price that gives the oil company an acceptable ROI is not difficult to achieve and helps everyone. Even the CEO would grudgingly admit it would make his life easier.

Agreeing long term prices for a small flow to plug the gaps and keep a strategic store filled is also very easy to do and guess what, UK has just such a long-term deal with Norway.

This gas supplied to homes and to electricity generators is mostly at a set cost that was agreed some time ago, or can easily be renegotiated without leaving anyone out of pocket. There is no excuse whatsoever to allow utility companies to hold the entire country to ransom using spot market movements to set their rates and pocket the vast difference for themselves.

The idea that the UK government and others are playing cat and mouse with Utility suppliers that set the utility bills of already struggling people on the basis of a corrupt and in any case, braindead gas trading floor is too obscene to even consider. Its frankly astonishing that such a thig exists in UK much less that politicians are willing to support this level of fraud against the public.

There are many ways this can be tackled. Fixing the price and telling them to like it would be ideal but we all know the power they have over funding political parties. Taxing them can work but only with a realistic price cap to stop them passing it all on to the consumers.

The prices are falling steadily even without intervention and this despite the ridiculous threats of even higher price caps this Winter. It must stop. No family should be paying more than £2000 p.a. unless they live in certain postcodes we all know. People on low incomes should be getting direct government assistance.

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Ed has enjoyed a dual career moving backwards and forwards between leadership roles in software engineering and transforming marketing functions.

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Edward Taaffe

Ed has enjoyed a dual career moving backwards and forwards between leadership roles in software engineering and transforming marketing functions.