Big household energy price increases likely this year

Bosses of the big six energy firms have been answering questions about prices from MPs on the parliamentary business and enterprise select committee.

Sam Laidlaw, the chief executive of Centrica, which trades as British Gas, said it was "clear that gas prices are going to have to move up".

Ian Marchant of SSE acknowledged that prices might rise by as much as 40%.

Rupert Steele, director of regulation at Scottish Power, said: "The whole industry figures will have to rise significantly."

Their comments came as MPs on the committee asked them to defend the big increases in gas and electricity prices facing households and businesses in the UK.

"We are seeing a seismic shift in commodity prices," said Dr Paul Golby, chief executive of E.ON.

"It's not difficult to see that the pressure is upwards," he added.

Price pressures

Domestic suppliers are under pressure to explain pricing intentions after the BBC learnt that household energy bills could rise by up to 40% this winter.

First, the current “oil crisis” is a crisis of our own doing. In 2004, several economists and energy experts noted that at the current rate of industrialization, supplies of energy would necessarily tighten over the next decade. At the time, few seemed to understand this fact, since oil was about $38/barrel on average, and gasoline costs were approximately $2/gallon. From 2004 to now, the price of both crude oil and gasoline have skyrocketed. Oil is now three and a half times what it was three years ago, and the price of gas has more than doubled. Thus, the “crisis” in oil didn’t just “sneak up on us” in the last year. Prices have been steadily rising steadily since 2000, after about a decade of relative price stability - with oil prices ranging from 16-23 dollars per barrel.

Also, demand for oil hasn’t exactly snuck up on us either. In 2004, predictions were made that the world wide energy intensity would increase. While energy intensity in the US is falling, in large part because of economies of scale and efficiencies made in the use of energy, overall energy demand is skyrocketing. Oil demand alone has increased by more than three million barrels a day. As countries like China and India become more industrializes, and the demand for products that contain oil worldwide grows with the world’s population, demand for oil will continue to increase. China and India are especially critical to this discussion because their rapid growth rates mean they will account for the single largest chunk of the “increase” in the use of oil over the next 20 years.

For decades, John McCain has been a part of this failure in Washington. Yes, he has gone further than some in his party in speaking out on climate change. And that is commendable. But time and time again, he has opposed investing in the alternative sources of energy that have helped fuel some of the very same projects and businesses he's highlighting in this campaign. He's voted against biofuels. Against solar power. Against wind power...

After all those years in Washington, John McCain still doesn't get it.

Historic oil prices shown on this chart are the annual average for Brent Blend taken from the BP statistical review of World Energy 2008. This year to date (YTD) is about $110 and the forecast uses an annual rate of increase of oil and gas prices of 25% per annum. It is of course near impossible to forecast future oil and gas prices, but with international demand for oil and gas continuing to rise against near static supply, the trend of increasing prices seen in recent years seems set to continue.

BERR forecasts consumption of oil and gas to remain relatively flat. This seems a reasonable first order assumption to make. However, in the real world, escalating fuel and domestic energy costs will lead to widespread conservation. The well-off will insulate their homes and buy more fuel efficient cars. The poor will switch off their heating and take the bus. It is near impossible to forecast the scale of energy demand destruction that will take place in the UK.

Oil and gas are assumed to have equivalent price. Millions of tonnes of oil equivalent are converted to millions of barrels by multiplying by 7.33.