atans1

Rising electricity prices: Tell us the truth

In Economy, Energy, Political governance on 10/04/2012 at 7:01 pm

Article 14 has got it absolutely right last week  http://article14.blogspot.com/2012/04/electricity-prices-go-up-because-of.html. He is right to point out that SP Services explanation of why electricity prices have to rise (that the price of natural gas is going up) is absolutely rubbish. World prices of natural gas have collapsed as Article 14 pointed out.

The explanation is simple, but I suspect it is an explanation that SP Services and the government want to “hide” from ordinary S’poreans who don’t follow energy prices and trends, or the evolution of the energy industry over the decades. The sad but funny reason is that there is no selfish or self-serving reason to “hide” anything.

Here’s an opportunity for the PM (“working together”) or Tharman (“I think it’s important for us to retain a relationship of trust between whoever is the elected government and the people”) to show that they are “walking the walk’ of “engaging” us.

As it’s the economics and evolution of the natural gas market that make us pay more for natural gas while prices keep going down, this should not affect perceptions of the government by reasonable (the majority) of S’poreans.

Over a week ago, the NYT reported,  the price of one million Btu of natural gas fell below US$2.20 for the first time since 2002, while oil prices slipped a little but remained above US$100 a barrel. The last time natural gas was this inexpensive, oil cost about US$20 a barrel.

Unlike the oil market*, the natural gas market, is not a global, nor an efficient one (outside of the US). (I’ll explain this in detail later using S’pore and Qatar as examples).There is only a limited global trade in gas (the S’pore government is trying to encourage such trade with the building of a gas terminal), which can be transported in tankers, but mostly gas must move in pipelines over land in Europe and North America, the biggest users of energy. Example: natural gas prices have been rising in Britain this year even as they have been falling in the US.

Supply has soared in the US because of increased production from hydraulic fracturing (a newish technology), but demand in the US cannot change rapidly. Power plants that can burn gas or oil were shifted to gas long ago. And a relatively mild winter in the US has reduced demand. There is now a glut there.

S’pore, as readers, will know gets its supply of gas from gas fields in Indonesia and Malaysia. The energy MNCs who developed these kind of fields did not develop these fields until they were assured that there were assured long-term buyers of the gas (This is still true today). There are a lot of upfront costs and the lead period from the time the fields are being developed to the first shipment of gas to the customer are measured in decades. Example: gas was discovered in Qatar in large quantities in the 1980s. It became a major exporter only in the early to mid-noughties. It took that long to build the facilities to ship the gas to places like Japan and South Korea, taking into account the time to negotiate the contracts.

Then there is the issue of pricing. Until very recently, natural gas contracts were priced off the price of oil because they were often found together, and both were scarce.

When the gas contracts for S’pore were negotiated all those many years, the price of the gas that S’pore pays was priced off the price of oil. Hence one reason of the paradox of us paying higher prices for gas when the price of gas is at a 10-year low. Another reason is that S’pore is locked into long-term contracts, and another is that until the gas terminal is operational  in the second quarter of 2013, we can’t get gas from another source. BTW, the plans for a gas terminal show that the government can get things right.

Now S’poreans are not the only people who got “screwed” by the breakdown between the price of gas and oil. KKR and TPG, giant and successful US private equity investors invested billions of their investors’ funds in TXU. One of the things they were betting on was that gas prices would be priced-off oil prices for the foreeable future. Err now even Buffett has lost money buying TXU bonds.

So why don’t we get told the truth of why we are paying higher prices when the price of natural gas has collapsed, when the answer has nothing to do with government or its agencies incompetency?

One reason could be that the PR people in these organisations are still stuck in the pre-internet model of news management. They believe and advise that “news” can be manipulated to fool the people all of the time.

More seriously, the government and its agencies may want us to think that their value (and high salaries of the senior staff) lie in making the right long-term decisions all of the time.

They should realise that S’poreans are no longer dependent on the government, its agencies and the constructive, nation-building local media for facts and analysis.

And that S’poreans have realised that long-term decisions don’t always result in benefits for S’poreans. We know that already because of the FTs, and public housing and transport problems, the result of long-term planning and decisions.

In the case of gas, it was (and still is outside the US) a rational decision to buy on long-term contracts gas that is priced off oil. It’s not a balls-up on the lines of the FT, and public housing and transport policies which has the government throwing money at the public housing and transport systems, and telling us that it’s changing its “FTs are betterest” policy.

Finally, market expectations are that this time next year, oil prices are expected to be almost where they are now, while natural gas prices are forecast to have risen more than 50%. What a great time then to shout about the competency of the government, when telling us that electricity prices are relatively stable? 

My point is that facts are changing, what may look bad for the government one day, may look good another day, depending on the facts. It shouldn’t “hide” the truth (especially when the truth doesn’t discredit the government) if it wants S’poreans to regain trust in the government.

————–

*Oil moves around the world in tankers that can be diverted from one destination to another in response to shifts in demand. A sharp change in demand or supply in any place is likely to show up in prices everywhere. Oil prices can also be affected by geopolitical concerns. Example: oil prices have risen on worries that Israel might attack Iran, leading to a drastic reduction in Iranian oil exports.

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  1. IF WE ARE CERTAIN THAT IF IMPORTED GAS HAS NOT INCREASE AND THE SUPPLY AUTHORITIES IS CHEATING US WE THE PEOPLE OF SINGAPORE HAVE ALL THE RIGHTS TO DEFEND OURSELVES, TO BOYCOTT AND SHOULD NOT MAKE PAYMENT UNTIL THEY CLARIFY. THEY ARE GETTING FROM BAD TO WORST GOING TO THE EXTEND OF FALSTIFYING ON PRICES .

  2. I don’t know your credential on gas and oil markets. But if this were to happen in the US, there would be a “congressional hearing” to get to the bottom of this. Unfortunately, you don’t have such luxury in Singapore. The truth is often colored to suit the (PAP-) government.

  3. They are not used to telling the truth. Its very hard to break a habit, especially when the people around them (i.e. their working environment) do not tell them they appear very foolish.

    Its the Emperor’s New Clothes.

  4. [...] Disclosure – Thoughts of a Cynical Investor: Rising electricity prices: Tell us the truth – isaw-isphy: Philanthropy and Succession – Furry Brown Dog: Tharman’s remarks in the context of [...]

  5. Already told the PAPies 5 years ago to dump the Indos and the mullahs and go strike a deal with the US. Even during the pre-collapse days of gas prices in 2007/08, US gas was still much cheaper than the cut throat prices the useless SP and EMA were rubber-stamping (also known as negotiating in their circles). Even spending $1B 5 years ago to co-invest with US for fracking and to build LNG export terminals and pipelines will be money well spent, instead of donating to the oil & gas pirates in this region.

    Btw, even though the PAPies are building LNG terminals, this is no use unless they can get good contracts to secure shipments from US export gas terminals, otherwise we still will not get the cheap gas coming into the new S’pore gas terminal.

  6. Damn PAP to eternity!

    Is the opposition ever going to put up some hard questioning in Parliament about this?!

  7. Gas isn’t a world market because transporting gas across oceans is very expensive. Gas prices have dropped by a lot in North America, but they remain sky high in Asia.

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