No Hot Air

Year end...

December 31 is as arbitrary a date as any to make predictions, which we will, giving the usual nod to the old adage that predictions are dangerous, especially about the future.

Nothing underlines the futility of futurology more than what has happened over the past year:  Even someone as contrarian as ourselves wouldn't have wasted electrons predicting bank nationalisations, collapse of the world economy, $100 range for oil over six months etc etc. We would have taken long shots on President Obama, the rise of the Euro and a new emphasis on energy conservation, but throw enough predictions on the wall and some will stick.

What interests us is not that people make predictions. One of today's marketing buzzwords is "the narrative":  people like to be told stories. What interests, amazes  and shocks us is how much money some people pay other people to tell them these stories. And stories they are. One person's narrative  can be either a fairy tale or astrology or a religion. But people pay for narratives/horoscopes/creation myths much more if a financial analyst throws in a few charts and sells it as a research note.

Or at least they have until now, and the fact that going forward people won't be so eager to shell out what little cash remaining on hand to listen to stories will be revealed as one great positive to come out of this mess. The whole house of cards came down because some, OK most of us, believed in a really dangerous fairy tale: risk had disappeared, and the world would have an unending march towards eternal prosperity.  In our little niche of specialisation, this was particularly true of energy risk: people wanted to ensure that they would have fixed energy costs, even as we saw that the rest of the risk spectrum was disintegrating.  Result: many fixed energy costs in Q2and Q3 which only ensured facing much higher energy prices than those who, like ourselves, belong to the que sera, sera school of risk management. Energy prices are as inherently unpredictable as every other thing people "forecast": stock prices, house prices, interest rates, currencies, weather:  All of them can be predicted with declining accuracy the longer the time horizon.  But people are waking up to the fact that saving energy saves money whatever the price is,however far in the future one feels this compulsion to predict.

One interesting thing about UK gas and power prices year on year:  Oil is down 60% but gas is broadly similar:  55 pence per therm year ahead last New Year's Eve and this one.  Does this mean that gas has further to fall?  Possibly. And possibly not. Que sera, sera.  Predicting the future by simply extrapolating the past, simply doesn't work. Our favourite economic quote comes from John Maynard Keynes, whose ideas no one would have predicted as coming back from the dead last New Year's Eve: In the long run, we'll all be dead.

Checking both actuarial tables and our vital signs, we make a hopeful prediction that on December 31 2009 we will still be able to make predictions.  Anything more than this is mere guesswork. But we can't resist telling some stories ourselves, and again using the theory that the greater the number of predictions the more likely that one at least will come true, here goes, but with a caveat.  Some of these predictions will come true, but when?  One year is relatively short, so we increase our odds by saying that over time, by lets say 2015 (which is closer than we think) more of these will likely be to correct than those of which will be shown by history to have been spectacularly wrong:

• Will Obama save the world?  Let's hope so, while hoping that the American people face up to the reality that they re-elected Bush. They fell for his narrative, and the whole economic system he was part of must, (will?) also change. If they can do this, and early signs are good, then the latent dynamism of the US could have a major impact on the rest of the world.
• But one part of the realignment will be the need for a multi-polar world. We believe the US can deal with that. But can Britain?  For sixty years, UK governments have slavishly followed the US right wing policies: Now the US is left of centre, will they continue to follow the model, or will they listen to the failed older Washington Consensus and not the new?  Reading UK newspapers, written by lazy, incurious journalists who find it easier to trot out old cliches or Conservative thinking, it appears not. When the Tories equate Labour economic policies with a "loss of moral compass",  it speaks to us of a failure of imagination and simple British pig headedness in refusing to face up to new realities. One solution: stop reading UK newspapers until they have something new to say: it only encourages them.
• It may not happen this year (note the may) but the pound is dead. An ex-currency.  But when the predictions are not ony for euro parity but also for dollar parity, it only makes us hope it comes sooner, although as this is Britain, by definition it will come later.
• Going back to Obama, the re-tooling of the economy is tied up with a new energy economy. Less is more. Not acting is as valuable as acting. Waste, of resources, time and over-consumption will be a thing of the past.
• Will the 2009 economy have green shoots of recovery, or simply a whole bunch of deadwood bankers?  Depending on the day, it's more likely the latter. We'll make a prediction that may sound radical today, but one has to bear in mind that it would have only been made by a madman two or three years ago, so the likelihood is going the right way:  Things will get so bad that legally, as well as de facto, most of the world banking sector will be state-owned. Citibank and Bank of America and Barclays and everyone else will be the Moscow Narodny bank of the 21st century.
• Technology will be the salvation of us. It may not give us back money, but it will provide time. People will invest that time in doing productive things which currently have no value: Sleeping, reading, making music, walking, making love, cooking real food, traveling, playing with children and yes, even story telling. We may be poorer measured in money and what it helps us consume.  But the Gross National Happiness will be off the scale compared to today.

If we make it to 2015, or 2020, in one piece it will be because people abandoned old concepts not retooled them. We are optimistic that we'll make it. What alternative do we have?

Appearances are deceptive

A story in the NYTimes today underlines again the paradox of thrift in energy:

The best way of cutting energy costs is cutting energy use.  But saving money simply by using less is a less obvious course of action to many than appearing to do something to save money.

 

energy experts armed with mostly low-tech tools but strong sleuthing skills, finding flaws that let the air inside a house go through a full exchange with the outdoors twice an hour, instead of once every two or three hours.

Correct those flaws, and heating and cooling costs are typically cut by 20 percent to 30 percent, a saving of more than $1,000 annually in some households. In addition, carbon dioxide emissions and the strain on the national electric and gas systems are reduced.

Energy technology research competes for federal aid, said a spokeswoman for the Energy Department. Some states contribute their own money or divert federal money intended to help the poor pay their energy bills.

But utilities that furnish electricity, natural gas and home heating oil have lobbied strongly for programs that provide money to help pay bills.

Here in the UK, despite successful insulation programmes for the elderly for example, we still tend to think the same way.

In I+C energy the emphasis has been on lowering energy price, not energy use.  TPIs and government have pushed market forces to lower the cost of energy instead of looking at the amount of energy consumed.

Should we spend billions on new nuclear plants?  Or try and reduce use, for lower and quicker paybacks?

The end of expertise

What does the economic collapse foretell for the future of the economic experts who failed miserably to predict it?

An entire field of experts dedicated to studying the behavior of markets failed to anticipate what may prove to be the biggest economic collapse of our lifetime.

One portent should be: don't pay for expertise.  Forecasts are for the foolish, told by the incompetent or the criminal.

Gazprom (yawn)

Every year they roll this one out and why not? People are suckers for either disaster stories or narratives with heroes, villains, and easy answers. And every year they fall for this one.

Like the Tories with deficit spending, many people still can't quite come to terms with a post Cold War world.  They equate Putin's Russian eagle with a Soviet Hammer and Sickle.  At least the Soviet Union as threat scenario hung on at least remotely credible back story of a global ideology replete with millions of fellow travelers ready to use gas as a weapon to strangle Europe.  Although as we now know, the CCCP threat was seriously overstated to serve both a variety of domestic political agendas. The specific reality of Soviet gas supply was that it ran uninterrupted throughout any number of cold war crises: Afghanistan, KAL 007, Chernobyl, Olympic Boycott etc etc.

It's hard to see what fate would befall us in Europe if we gave in to Russian "demands".  Would Russia stop sending tourists filled with money to Harrods and stop investing in Monaco or St Moritz?

But most Januarys lately, the story is Russian holding Europe hostage to energy by asking Ukraine to pay for it's gas.  Some reality checks here:

1. If Russia and Ukraine have a fight over gas, you as a customer of Gazprom UK, or anyone else wont be impacted.  It sounds unbelivable that people would think they might, but some really stupid people do.
2. If this is a battle between economic liberal democracy as represented by Ukraine's US neo-con pals on one side and Russian statism on the other, why shouldn't Ukraine pay full world prices for energy like the rest of us?
3. Are we missing something here, but if Ukraine don't pay for their gas, and use the Russian gas being transited across their country for their needs, isn't it Ukraine holding Europe hostage?

4. The other side of import dependency is export dependency.

5. Sowing fear over "security of supply" non-issues pushes prices up.  There is no gas shortage anywhere on earth.  Why on earth pay more for it?

An observation..

That terror with the regulatory hobnails, Ofgem strikes again.  £1.8 million fine on npower over deceptive selling practices.  None of the practices have actually been described as far as we can discover, but let's put this symbol of a tough new role for the reulator in perspective.  Last year npower made £770 million in the UK and €1.06 billion for just the third quarter for parent RWE.

So those regulatory hobnails crushed a whole morning's profits from them.

Smart Metering comes back from the dead

Smart Metering has been almost smothered at birth by both the UK Energy Establishment of the old BERR and Ofgem.  None of them wanted to actually save money by not spending it, and if people started NOT spending money, where would it all end in the consume everything that moves culture? Actually having tools to know how much energy businesses and users use should help them to save it.  The greatest energy savings come from not acting.

But BERR is no more and the world is changing, albeit at the pre-global warming glacial stage that signifies British life.  Ofgem is in deep doo-doo at last and few can take their deathbed conversion to removal of market abuses seriously.

The new guys are the Department of Energy and Climate Change, who are actually interested in doing something useful about both.  A sign is that the news that smart meters are to be launched comes from technology sites.

Major telecoms and technology firms are beginning discussions in order to prepare for a run on the British smart meters contracts that is sure to worth billions of pounds.  Telecoms BT, O2, and Vodafone along with systems developers Accenture, Logica, IBM, and Capgemini have begun talks that are expected to result in a bidding consortium

The piece goes on to say that the government has decided to go ahead, with implementation from 2010 and a tender from next year.

Allegedly the meters will cost £15 per year.  Quite a bit less that the £47 per year that Ofgem was predicting as too expensive only last year.

Fixed prices from IBG energy consultants

Something strange is happening, not for the first time and certainly not for the last, in energy markets. 

Many SME end-users, have been con(vinc)ed into going for long term (one year and up) prices by what we call IBG energy consultants.  IBG stands for what happens when the end user starts looking at their price a little bit more closely, and especially when they see that prices for their competitors are collapsing but remain fixed for them;  IBG = I'll Be Gone.  Even worse, IBG sometimes even stands for internal buyers.

SME's often make the wrong energy choices because they start off knowing little or nothing about energy, and if they then get advised by the majority of Third Party Introducers they rarely end any the wiser, although often poorer.

Two basic energy fallacies are that volume (how much you buy) is important and a fixed price is safer.

Gas and electricity are traded, fungible commodities.  If an SME is smart they pay an index commodity price, fixed and transparent supply charges that are identical from all suppliers and a margin.  The margin can be variable with your size, but even a small user should get away with five per cent or less.  Your business would go bust at those margins, but suppliers don't:  they have the benefit of massive demand, scalable systems and a lot of customers far less informed than you are who really pay through the nose.

But not a lot of people know this.  They think that buying gas is like buying paper clips:  The more you buy the less you pay.  More importantly they forget completely about the key impact on price:  it's not how much you buy, it's when you buy.  Supply is important: Demand is more important.

So, gas (and by extension power) cost more when demand is greatest, and not so much when demand is less.  Gas is made even more complex by the geological fact that it is produced at a fairly even rate, but we won't go there right now.

A gas price is made up of a strip of monthly prices that generally reflect the demand reality that January is expensive and July is cheap(er).  Or that's the way things should work.  But lately a one year price is the same as December's day ahead price.  Why pay the same rate for April, July or October as during a peak month.  And a peak month price based on the coldest December in 30 years?  That's even nuttier.

The only logical reason why next year gas prices are the same as today, or higher in some cases, would be if there was a sudden explosion of demand based on a rapid economic expansion which fed into oil prices.

It would be an interesting problem to have, but how likely is that scenario?

You've been framed (again)

In behavioural economics, framing means the way a choice or outcome is presented.  In criminology, framing is setting people up without evidence.  See the connection?

Ofgem is a past master at framing in that they pluck a number out of the thin air contained in a hat and present it as a saving to the consumers of Britain.  And, we must admit, the savings often exist. 

The problem arises in that any number bandied about in energy is going to be so big that it sounds good.

This week, Ofgem was crowing to the press about how they had put the "regulatory hobnails" (note the use of such hip, trendy language. From the 1820's) on, and were able to claim to the Times that they had saved UK consumers "about" £500 million. Or was it £300 million  as the FT said.

The number is meaningless when considered to two other numbers:  48 million electric and gas meters and an average domestic spend of £1100. So even the larger number means "savings" of about £20 per year.  Is that really the kind of savings that means anything?  Of course not, but it gives Ofgem a bit of breathing space. Although not from us.

Bull to Bear and back...

Further proof that predictions are meaningless in this Bloomberg story on the yes, no, maybe saga of the Merrill Lynch (who owns them these days, we lost count) energy guru Francisco Blanch who gives forecasts that occassionally make people blanch.

Blanch changed his 2009 price forecast at least four times this year as the worst global slowdown since 2001 spreads. His most recent estimate that crude may fall to $25 came on Nov. 26. The Organization of Petroleum Exporting Countries’ 13 members meet in Oran, Algeria, tomorrow to try to stem crude’s decline.

“A shift of views from an analyst is a good thing,” said Pierre Andurand, chief investment officer at BlueGold Capital Management LLP, a London-based hedge fund that manages $1.1 billion. “It means he takes the change in economic conditions and the change in balances into account. We can’t say that for many of them.”

Well of course the more forecasts you make the higher the likelihood of at least one being correct. Blanch's claim to fame was his forecast of both $150 oil and a resultant crash.  Whether that was due to erudition, luck or a gift for frequent incisive comments we don't know. We certainly agree that oil is near it's low, apologies now to Donald Trump who we mocked on 30 September when one of his ravings was for $20 oil.  And we can see that oil could boomerang if the economy suddenly takes off. But the way this economy is going, even President Obama (how we love saying those words), who will have a massive psychological boost on markets,  won't actually be walking on water to put everything back together again.  Or maybe we're wrong, Bernie Madoff will find a few tens of billions of dollars in that suit he left at the cleaners and everything will be simultaneously dory and hunky.  Who knows?  Not us, but then we're not in the predicting business.  And neither should anyone else.  But people want to hear stories, and one of the faves has always been that the impossible (you can beat the market for example) is possible.  In energy, just like most markets, people pay for this "inside" information.  But what is it worth?

His $25 prediction may have received more weight than it deserved, said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts.

“Sure, if the Chinese economy gets really bad, we could go below $25,” she said. “It’s kind of like saying if the temperature drops, it will be cold outside.”

Blanch, who runs half-marathons and takes the subway to work, said the likelihood of $25 oil is less than one in three.

“The best you can do is sort of set out a number of alternatives and try to set out within your central forecast what are the risks around it and what are the alternatives,” he said. “Nobody has a crystal ball.”

Which sounds familiar from our home page About No Hot Air

We don’t have a crystal ball on what’s going to happen in energy. On the other hand, no one needs to cross our palm with silver.

Flattery will get you nowhere

Sorry to break the news but you aren't special.  Many energy users think they are.  They like to flatter themselves, and they will also pay people to  flatter them.  The flattery they seek is:  you're special, your company is special, your energy spend is special.  Our intervention will get you a better price and for this all we need is for you to give a modest (!) contribution to our charity.

Maybe that's why NHO doesn't make much money.  We tell the truth:  your gas and power price depends solely, completely and unutterably on drivers over which you do not, and never will, have any control over. 

But energy consultants like to tell people different.  You’re special, you can get something that other people can’t get. And people pay to hear it. 

Flattery will not only get you nowhere. You'll end possibly worse off, at the absolute minimum if you measure time as money.  Hiring a consultant or TPI involves not only paying a fee, but spending time.  Time spent providing information, and paying others to analyse your own figures.  Time spent discussing options with third parties instead of doing it yourself.  And most of all time spent regretting your decision.  Buyer's remorse on a fixed price energy contract will get you sooner or later.  Why pay to constantly check if the decision was right.