Gas – Unfair at any Price

British Gas owner Centrica’s announcement of £992 million profit for the first half of 2008 only a day after putting up gas prices by an eye-watering 35% has caused predictable howls of outrage and calls for a windfall tax from left and left-leaning politicians.

This would be a mistake.  In fact only 17% of the profit is due to retailing residential gas with the vast majority coming from ‘upstream’ – i.e. producing gas from fields in Morecambe Bay and the North Sea – even though this is a relatively small part of the business.  British Gas is not allowed by law to subsidise its residential sales from upstream profits even if it wanted to for fear this would give them an unfair advantage in the market.  In the medium and long run it is far more important that they and others like them have the incentive to invest in additional energy supplies (especially renewables) that will eventually bring prices down again.

As has been observed often before, the cure for high prices is high prices.

But there is also a political issue.  The implication of a windfall tax is that the Government can redistribute it to those in fuel poverty.  This sounds perfectly fine but unfortunately it doesn’t work.  Energywatch recently said that social tariffs reach only 1 in 15 of the most vulnerable households.  And that’s before factoring in the huge bureaucratic cost involved which the country can ill-afford. 

Socialist solutions sound great but unravel when you look more closely.

However, I am very uncomfortable with the whopping £144 per annum extra paid by those on pre-payment meters compared with the relatively affluent on direct debit.  This is the result of a paradigm that says each of us should have maximum choice in each and every area of our lives.  But why?  As it happens I have just fixed our own household energy prices well ahead at the old price so I am able to be perfectly relaxed about the coming winter, but for every winner there will be several losers.  Moreover, the multiplicity of deals on offer from the energy companies makes the market quite remarkably opaque.  A good system would be one accessible to all in society and not just those with more money and/or education.

It is no surprise that society is getting more unequal under Labour.

As an alternative, why not require the energy companies to have just a single transparent tariff for all residential and small business customers (except perhaps insofar as they could demonstrate a genuine difference in the cost of supplying that customer – i.e. a set amount for the additional cost of a pre-payment meter).  ‘Choice’ would be reduced but transparency and fairness would increase dramatically, the energy companies would save a bundle on sales and marketing (and I for one would be delighted to see no more of their salesmen!!) and there would also be multi-million pound savings from not having to pay off comparison websites (I understand that each switch nets them circa £40 so their interest in promoting ‘churn’ is understandable) which would find its way back to the customer in lower prices.

And finally, with ministers and senior civil servants in the same boat as ordinary people it might just concentrate minds that need to be concentrated on, for example, why energy prices are now so much higher here than in Europe even though we have more domestic supply than almost any other EU member.

Small Earthquake in the Energy Market

Liberal Eye is feeling ever so slightly smug today.   The House of Commons Business and Enterprise Committee has been grilling the bosses of the big energy companies about rising prices and concluded as I blogged last week that the energy market is simply not working properly.  Its Chairman, Peter Luff, was all over the media yesterday with their conclusions – click here or here (audio) for details.

The MPs agree that there is no evidence of price collusion among the big six energy suppliers but note that it’s easy for each to predict what the other five are going to do on price and conclude that:

It is clear that there are very real problems in the energy markets at all levels … which need to be addressed.

In particular they are concerned that the established players are preventing new competition emerging, that UK consumers are paying more than those on the Continent and that there is a massive disparity between prices charged to those in fuel poverty (most of whom are apparently on quarterly credit tariffs and NOT on pre-payment metres) and an affluent minority who can afford to pay by direct debit.  Both Ofgem and the Government come in for sharp criticism.

In short, the MPs could hardly be more damming.

Liberal Eye notes that if you plan to take over British Energy for £12 billion you must have a pretty clear idea of how much you think its future earnings are worth and this in turn depends on future prices.  So if  two energy companies are jointly negotiating to take over a third there must have been a great deal of sharing of thoughts on prices.  This is sailing perilously close to the wind.  (The definition of a cartel is what precisely …?) 

At first glance this is the sort of story that a headline writer might summarise as “Small earthquake in Westminster – no-one Injured” .  However, this would be to wholly miss the real significance of this story.   The headline should read “Small earthquake fatally undermines dam foundations – creates crisis“.  The reason?  The Labour Government, like the Conservatives before them, have put their faith in creating competitive markets in the industries they privatised.  The market would, they promised, keep prices competitive and through its ‘dead hand’ protect the public interest with just the lightest of light-touch regulation to keep things on the straight and narrow.

This plan has now palpably failed and the market fundamentalists’ delusion stands exposed as a fallacy nearly 30 years after it became the dominant economic meme in the Thatcher/Reagan era.  That is why I regard the emergence of these problems in the energy market as fundamental.  It undermines the very foundations of the ‘market fundamentalist’ cognitive policy that has shaped politics over the last 30 years.  (In passing it’s worth noting that similar issues exist in other sectors - banking, retail, public transport etc.  The public are again the losers paying greatly over the odds for most of what they buy).  The Government will, of course, soldier on trying to patch and mend as they go but it will be to no avail.  It is effectively impossible for a Government to change cognitive policy mid-term so we must wait for a new one.

So here’s a prediction: whichever Party first manages to articulate a convincing alternative to market fundamentalism will sweep all before it.  But will this be the Conservatives who like to think they understand economics (but got us into this mess in the first place) or the Lib Dems who tend not to like to think about economics at all (thus securing their record as easily the most unsuccessful Party of the twentieth century)?

Is it just my suspicious mind …

… or is this morning’s announcement by EDF Energy of swinging price increases (22% for gas, 17% for electricity) connected to yesterday’s news that they and Centrica are close to final agreement to buy UK nuclear firm British Energy in which the Government has a big stake?

Note: EDF Energy is the UK subsidiary of Electricite de France – the French state-owned nuclear utility which has 58 nuclear power stations in France.  In the UK it has acquired SEEBOARD (formerly South Eastern Electricity Board), London Energy (formerly London Electricity Board), and SWEB Energy.  The attraction of British Energy is said to be largely its portfolio of existing nuclear sites which are seen as the best bet for the location of the next generation of nuclear power stations planned by the Government.  Entirely by coincidence I blogged on one of the shortcomings of this plan only yesterday at almost exactly the time the takeover was being announced.

While it’s perfectly true that global energy prices are high is it just possible that the price rise will include an extra bit to pay the £12 billion price tag for British Energy?  With three of the larger UK utilities involved, the competitive pressure acting to moderate price increases is clearly much reduced.  Even the other utilities are not likely to be much help.  For them the obvious strategy is to play ‘price follower’ – slip streaming the EDF/Centrica/BE troika’s lead on price to trouser extra profit while bemoaning the ‘difficult’ world market.  Significantly, only a 10% gas price increase is expected in France according to John Hemming’s Web Log.

Meanwhile the BBC’s Robert Peston askswho gets the Government’s £4 billion share of the proceeds.  In theory it goes to the Nuclear Liabilities Fund to pay the huge bill for decommissioning and cleaning up existing nuclear power plants but Peston worries that it may, in effect, be used as an offset against public borrowing.  He has a good point.  (The comments thread is also worth reading).

So to recap.  It appears that we have a situation where countless people will fall into fuel poverty partly to pay for the acquistive strategy of a company wholly-owned by a foreign Government while our Government gets only a bung to cover it’s short-term funding difficulties while leaving the costs of clean-up to the next generation. 

You couldn’t make it up!

Why TINA has Ruled Britain for 30 Years

When contesting for power and afterwards in office Mrs Thatcher had a powerful ally, TINA.  I forget when or in what context she first deployed TINA but her theme: “There Is No Alternative” became for me at least a kind of poster child for her World-view and her approach to government.   

At the time I only dimly grasped that something was going on beyond the simple ability to build a policy platform out of opinion poll gleanings so I am indebted to Joe Brewer and George Lakof of the Rockridge Institute for illuminating it in this important article first published back in February.

Brewer and Lakoff’s key insight is that there are two dimensions of policy – ‘Material Policy’ – the familiar stuff of specific plans for health care, education, the economy etc. – and ‘Cognitive Policy’ which is the ideas, frames, values, and modes of thought that inform the political understanding of material policy.

Hence, Material Policy is built on a foundation of Cognitive ideas and the fact that these are often implicit and unconscious only adds to their power.  Thinking ‘out of the box’ is hard enough at the best of times and nigh on impossible when we don’t even realize that we have been put in a box and that the lid has been slammed shut and nailed down for good measure.

In deploying TINA Thatcher displayed an instinctive grasp of the crucial importance of ‘Cognitive Policy’ – a concept which the Lib Dems more than 30 years later still haven’t got to first base with.

Many hated the material policies spawned by TINA (including many in the Conservative Party) but unless they could successfully challenge TINA (which they couldn’t – it requires a coherent alternative World-view and this is not easily derived) their challenges were dismissed as ’special pleading’ or the like.  Thatcher brushed opposition aside like a supertanker through a flotilla of smaller craft.

Labour was powerless.  After the debacle of the Winter of Discontent it could hardly argue that it had an alternative.  Even after Kinnock had rebuilt the organization and  Blair made the Party electable again there was remarkably little new thinking.  TINA got a makeover and a slight tilt to the left but the essence was unchanged.

For the Lib Dems the results were, if anything, even more toxic.  Already struggling to fight out from under the weight of years of socialist cognitive policy (briefly: big government run by us can and will solve all the World’s ills), this was too much for a Party with slender resources and a too-fragile grasp of its own heritage.  It resorted to a never-ending guerrilla campaign which, although brilliant in its inception, became almost an end in itself.   I suspect that the allergic reaction of Lib Dems to the whole Thatcherite project combined with weak (virtually non-existent) cognitive policy leadership convinced many of them that economics in particular is somehow grubby and something that ‘nice’ Lib Dems should best avoid.  The result has been to challenge for the title of the ‘Stupid Party’ traditionally belonging to the Tories while most the Liberals I have met in the last few years see no reason to join the Party.

The challenge is now to put that right and that means tackling the cognitive challenge head on and not, as David Boyle recently put it: …”falling back on the current combination of inserting minor policy suggestions into the media and then campaigning on empty”. 

Fortunately, things seem at long last to be looking up slightly.  Nick Clegg has put in hand the Bones Commission which will hopefully get to the bottom of why Cowley Street has so disastrously underperformed for the last 20 years (IMHO) and he is beginning to say the right things on devolving power, small government and fairer taxes although not yet on the EU. 

My diagnosis is, and always has been, that many of Britain’s ills stem from a lack of liberalism in government over many decades, a deficiency that has been particularly acute in the 30 years since Thatcher came to power.  Now is the time to put that right and the place to start is developing a clear cognitive policy that encapsulates the sort of liberal values that our forebears would recognize.

Nuclear Policy all at Sea

The Government wants to build a new generation of nuclear power plants in Britain – but where?

It’s a fairly open secret that they favour putting them at existing nuclear sites which are almost all around the coast and there are indeed good reasons for this, including:

• Public acceptance is likely to be easier to win; existing plants are typically an important part of the local economy and people have got used to having them as neighbours.
• Grid connections already exist.  Creating connections for new sites would be a substantial additional cost and probably strongly contested through the planning process.
• Cooling water is readily available.

There is just one small problem: global warming and any associated sea level rise.

The obvious (but wrong) assumption about this is that if sea level rises by, say, one metre then the coast will retreat to the one metre contour.  It won’t; the position of the coast at any moment in time is the result of a finely-balanced equilibrium between land and sea and even the smallest perturbation can upset this balance so that a given rise in sea level can cause the cost to retreat up to 20 times as much depending on local conditions.  Areas where the coastline is low-lying and formed of soft sediments (like Sizewell, Bradwell and Dungeness) are those most at risk.

Of course we don’t know when, or even if, melting icecaps will casuse significant sea level rise.  Some scientists fear that we are near a tipping point where the Greenland ice sheet starts to melt although others are less concerned.  For myself, I am increasingly sceptical of the extent of anthropogenic global warming though climate change caused by entirely natural processes is clearly ongoing.  However, the fact is we really don’t know for certain either way.

The complete break up of the Greenland ice sheet would add around 7 metres to sea level but would take centuries even in a worst-case scenario (think of how long it takes to defrost your freezer).  It could still potentially cause significant sea level rises over the next few decades with powerful implications for the stability of low-lying coastlines.

According to an edition of BBC R4’s ‘Home Planet’ back in February this is why the IPCC recommends that new nuclear power stations are NOT built in exposed coastal locations.  I have been unable to verify this but it’s clearly the prudent approach.

Let’s not play Russian roulette.

Needed: better regulation

For as far back as my political memory goes ‘regulation’ has been a dirty word.  Of course, this hasn’t stopped politicians reaching for new regulations and regulators at every opportunity (would it be too cynical to say in response to every tabloid headline?)   

Unfortunately the QUALITY of regulation is not matched by the QUANTITY and as a direct result the government has problems at every turn.

First to blow was Equitable Life on which the Parliamentary Ombudsman has just reported.  As Paul Braithwaite of the Equitable Members Action Group (EMAG) put it:

The UK regulators were fully aware for a decade that Equitable Life was effectively insolvent, yet they allowed the company to suck in another £20bn in pension contributions from more than a million new investors.

Quite reasonably they want some of their money back.

This is hardly small beer, but only a curtain-raiser for the credit crunch that broke open last summer.   This is the direct result of the fact that for many years major banks were operating what amounts to a Ponzi Scheme - a fraud involving paying abnormally high ‘profits’ to investors out of the money paid in by later investors rather than from any underlying real business profit.  Needless to say the regulators are supposed to stop this sort of thing but appear to have been too busy checking the petty cash to notice what was going on leaving the banks free to devise cunning ways to wriggle free of any regulation so that much – in some cases most – of their business escaped the regulators.   Inevitably this has ended in tears; we are all poorer as a result and will be living with the consequences for years to come.

Then just yesterday the BBC carried this story reporting that the lack of certainty over the value of university degrees is “descending into farce”.   This involves far less money but is perhaps the most serious of all for it strikes directly at the life chances of a generation.  All of us, students, taxpayers and employers alike, should be able to rely on the fact that a British degree means what it says on the tin.  Anything else is tantamount to fraud.

So what conclusions do I draw?  Simply this; we need good regulation for the safe and efficient functioning of the the complex world we live in.  But not too much or quantity will drown out quality.

The Trouble with Oil

As oil prices hit yet another record of over $146 per barrel the good folks at The Oil Drum blog have published a timely update of the Wikipedia Oil Project Database.  It makes frightening reading. 

What they do is compile stats on all the oil megaprojects in the pipeline to estimate when and how much additional oil will come to market. 

 The big dark blue area is production already established before the project started.  The coloured stripes represent the contribution from fields brought into production since then, organized by year of first oil while the small red diamonds represent actual production as estimated by the EIA (Energy Information Administration).

It is clear we have a problem, a monster problem; the scenario illustrated in the graph shows some increase up to 2010 then a precipate decline.  And remember, this includes all projects in the pipeline.  Any new discoveries (and there are precious few of those thesedays) will come onstream too late to change this picture even if there are no political, technical, climatic or other delays (which there will be almost by definition since any significant new discoveries will be in frontier areas like the high Arctic or ultra-deep water).  In fact, even the identified oil projects have already shown an alarming tendency to accumulate delays.

The ‘bottom up’ approach adopted by the project team can be difficult and sometimes controversial.  The oil industry is plagued by dreadful statistics and the rate of decline of existing fields (the big dark blue area of the graph) is very uncertain.  This scenario graphed above assumes a decline of -4.5% pa.  However, there are reasons to suspect that it could soon become a much steeper decline.  (Just to take one example: there are persistent rumours that Saudi Arabia’s monster Ghawar oil field – easily the World’s largest and single-handedly responsible for over half of Saudi production) is beginning to suck dry although this is denied by the Saudis).  If this is the case then this graph represents a very optimistic scenario indeed.

Actually, it doesn’t matter how bad the statistics are, or how much oil is or isn’t left in the Ghawar field.  These uncertaities only shift the timescale and then only slightly and most of the uncertainties are downside.   This is the inevitable result of geometric demand growth coming up against the constraint of a finite resource.

This is by far the greatest crisis we have faced since World War 2 and there is precious little time to devise and implement a transition to a post-oil economy.  Where is Churchill?

 

 

Brown’s Tax Illusion

I’ve just heard Shadow Chancellor, George Osbourne, claiming on Radio 4’s The World at One” that Britain now has the longest tax code in the developed world – a claim that I’ve no reason to doubt.

In a sense this merely serves to confirm what we already knew – that Brown is a ‘fiddler’ whose vision (although this is hardly the right word) is to sneak in a little stealth tax here or tweak some tax incentive there, all as part of his plan to work towards his socialist nirvana where everything is ‘controlled’ and everything is ‘fair’.

There’s just one small problem.  It isn’t working because it’s not capable of working.

For one thing it’s not fair: a vastly complicated tax code makes that quite impossible.  The only people who benefit are the super-rich who can afford high-powered tax advice and the tax experts who provide it.  Ordinary mortals are left out in the cold unable to utilize the loopholes that the rich can. 

For another thing it’s expensive:  it is equivalent to out-of-control overheads in the context of a commercial company.  And what’s the first thing a company in trouble has to do?  Cut overheads of course.

And finally it generates the illusion of economic progress and a growing GDP as all those expensive tax advisors work away but it doesn’t actually generate wealth.  Quite the opposite in fact as resources – both human and financial – are diverted from productive uses into an arms race with HMRC. 

Bring on flat tax (or at least a reasonable approximation to it).  It is fairer, costs less, and doesn’t divert resources from proper uses.

 

 

 

 

Bush and Cheney want another war

 

For some time now there has been a rising tide of ‘chatter’ from segments of the US media that Bush and Cheney are planning another war.  Incredibly, it seems that they are even funding Al Qaeda –linked groups to achieve this as Pulitzer prize-winning journalist Seymour Hersh outlines in the New Yorker magazine. (Hat Tip: Jon Taplin)

 

“Late last year, Congress agreed to a request from President Bush to fund a major escalation of covert operations against Iran, according to current and former military, intelligence, and congressional sources. These operations, for which the President sought up to four hundred million dollars, were described in a Presidential Finding signed by Bush, and are designed to destabilize the country’s religious leadership. The covert activities involve support of the minority Ahwazi Arab and Baluchi groups and other dissident organizations. They also include gathering intelligence about Iran’s suspected nuclear-weapons program.”

The funding was eventually approved, although some legislators were troubled by aspects of the Presidential Finding, and “there was a significant amount of high-level discussion” according to Hersh’s source.

 

In recent years the Bush Administration has:

“… conflated what is an intelligence operation and what is a military one in order to avoid fully informing Congress about what it is doing.”  David Obey, a senior Democrat, is quoted as saying, “I suspect there’s something going on, but I don’t know what to believe. Cheney has always wanted to go after Iran, and if he had more time he’d find a way to do it.”

Another source familiar with the contents of the Presidential Finding said:

“The oversight process has not kept pace—it’s been co-opted” [by the Administration].  The process is broken, and this is dangerous stuff we’re authorizing.”

Sadly, the Democrats in the House of Representatives and Senate don’t seem to be awake to what’s going on.

 

On the ground covert operations are being run by Joint Special Operations Command (JSOC) at the behest of civilians without telling the uniformed military what is going on making it impossible for them to run a coherent strategy – a factor that played a big role in the early retirement of the highly regarded Admiral William Fallon earlier this year and the ongoing chaos in Iraq.  Apparently,

 “When Fallon tried to make sense of all the overt and covert activity conducted by the military in his area of responsibility, a small group in the White House leadership shut him out.” 

The dissident groups Cheney is supporting are by any standards the very last people the US should be funding and arming.  According to Robert Baer, a former C.I.A. clandestine officer who worked for nearly two decades in South Asia and the Middle East,

“The Baluchis are Sunni fundamentalists who hate the regime in Tehran, but you can also describe them as Al Qaeda.  These are guys who cut off the heads of nonbelievers—in this case, it’s Shiite Iranians.” 

(Khalid Sheikh Mohammed, who is considered one of the leading planners of the September 11th attacks, is a Baluchi Sunni).

 

Another group, the M.E.K., has been on the State Department’s terrorist list for more than a decade, yet in recent years the group has received arms and intelligence, directly or indirectly, from the United States as have the Jundallah, (also known as the Iranian People’s Resistance Movement) one of the most active and violent anti-regime groups which describes itself as a resistance force fighting for the rights of Sunnis in Iran.  According to one of Hersh’s sources,

“This is a vicious Salafi organization whose followers attended the same madrassas as the Taliban and Pakistani extremists. They are suspected of having links to Al Qaeda and they are also thought to be tied to the drug culture.”

Iran is certainly experiencing an upsurge in violence which is being reported in the Iranian media with increasingly frequent clashes and a growing casualty list.  Of course, US involvement cannot be proved but the Iranians have started blaming the US.

 

Needless so say, Cheney’s deranged warmongering will only rally support for the Tehran regime and if he is allowed to get away with it the only possible outcome is disaster on an unimaginable scale – not just for Iran and the US but for the whole world.

 

Just to take one example; Iran could, if it so wished (and as it has threatened to do if attacked) cut the Straights of Hormuz which are just 21 miles wide at one point and thereby cut oil exports from the Persian Gulf.  Even now, with just the looming threat of trouble, oil analysts say the oil price contains a substantial risk premium for this possibility.  In other words, Bush and Cheney’s warmongering is already hurting people around the World.

 

The UK government should make it very plain to Bush that this is unacceptable behaviour and bring our troops home now.

 

See also John Perry on this.