David Prosser: Russia's plan to force up your gas bills

Wednesday 24 December 2008 01:00 GMT

Outlook Hard-pressed households have every reason to expect significant cuts in their gas and electricity bills early in the new year – both are ultimately dependent on the global oil price, which has fallen by more than two-thirds since its peak in the summer. Still, if the Russian Prime Minister, Vladimir Putin, has his way – and he usually does – the respite on gas bills may only be temporary.

Chairing a meeting of the world's 12 largest gas producers, Mr Putin's message was pretty stark: gas prices are going up, he said, as countries such as Russia pass on higher development, exploration and production costs. To underline the point, Russia is at the heart of the plan to turn the group of 12 producers into a more formal coalition – an Opec for the gas industry, in fact.

It is this plan that should worry importers of gas such as Britain. Opec was set up with a simple principle in mind. Rather than competing with each other, which generally leads to lower prices, Opec's members decided to act as a cartel.

The group comes under pressure from the rest of the world to bring down the oil price when it rises to any great extent, but the real function of Opec is for its members to work together to keep oil prices up. A gas producers' cartel would work with exactly the same aim in mind.

Iran's energy minister talked yesterday of preventing "unnecessary and harmful competition" between producers – you can take it as read that he means harmful in the context of cartel members' economic interests, despite Russia's insistence that the group is more focused on the issue of energy security than pricing.

There is, however, some scepticism about whether a gas cartel will be able to operate in the same way as Opec. One problem is that unlike oil, which is traded on commodities exchanges, minute by minute, wholesale gas is sold off-market, through long-term contracts that lock in prices for extended periods.

In addition, gas is almost entirely transported through fixed pipelines, which makes it tricky for exporters to play off customers against one another. This may change, over time, as the market grows for liquefied natural gas, which is shipped in the same way as oil, but for now LNG remains a small part of total exports.

Moreover, for now at least, the price of wholesale gas remains inextricably linked to the oil price. Industry analysts are forecasting that gas prices will halve over the next 12 months, assuming that the oil price remains at or around its current level of $40 a barrel.

Mr Putin's prophecy, therefore, may take some time to come true. But that does not mean the West can afford to ignore the Gas Exporting Countries Forum, as the new body is calling itself. Far from it - while it could take a decade or more for the forum to acquire the price setting powers of Opec, but if Russia and others are so minded, they will get there in the end.

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