The continuous rise and fall of crude oil prices is well publicised in the world media, yet these fluctuations in cost are not always immediately reflected in our household and business bills. So how does the wholesale market work and what does this mean for your business energy costs
Wholesale oil makes up about 70-80% of the cost of your gas bill and 40-50% of your electricity bill. The business costs for power suppliers also include transmission, distribution, storage, and load balancing costs, which have consistently been rising in recent years.
Many of the big household suppliers generate a proportion of their energy, but also buy a large bulk of traded gas and power from wholesale markets. Gas and electricity is traded on 'contracts' set by energy firms and each supplier employs a team of traders and analysts who closely monitor the market prices throughout the day. These experts will then decide on the amount of energy to be bought in advance and the amount to be bought on the current market value, leading to huge fluctuations in wholesale prices.
Siobhan Lismore, senior reporter for market information provider ICIS Heren, explains that there are many factors that will affect the wholesale market
'The price is affected by weather, the stability of the oil markets, the supply situation and many other factors. Energy companies will buy a supply in advance or on the spot price - so it's misleading to compare contracts.'
Hence whilst the world market can act as a guideline, deciding whether your business gas bill is fair is not as simple as comparing your costs to the average spot price of wholesale energy. If there were a sudden drop in temperature, for example, wholesale prices would go up and then fall once the weather reaches a normal level again. As the market is liquid, different suppliers also never buy energy at the same time, which is why some companies have to make price increases and some can delay them.
Yet whenever there is a clear and continuous upward trend in wholesale energy prices, it is inevitable that these increases will eventually be reflected in business gas prices. Predicting the price of crude oil in 2011, however, is far from an exact science and involves balancing huge economic factors. The damage of the BP oil spill will weigh heavily on the thoughts of the industry for many years to come and may inspire new government policies both in the USA and beyond to further restrict underwater oil drilling. Alternative methods of oil extraction, from tar sands for example, are more expensive and a shift in the focus of drilling will undoubtedly lead to higher prices. The world is also struggling to recover from the global recession, with people and businesses spending less to preserve capital. If the economy improves and demand for overseas products increase once again, global oil consumption from large ships carrying goods around the world will drive crude prices up.
As it stands, price hikes are a stark reality in 2011. Ofgem have predicted that wholesale gas and electricity prices will continue to rise over the coming months, estimating that by the spring UK gas purchase costs may increase by 13%.
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