Gas Industry and the Impact on UK Economy - Essay Example

?Running head: UK Economy Gas Industry and the Impact on UK Economy Insert Insert Grade Insert 07 May Outline I. Introduction II. Supply and demand in the gas industry III. Market structure IV. Inflation V. Economic growth and unemployment VI. Conclusion VII. Bibliography Introduction The gas industry has a substantial impact on the UK economy. This is because the United Kingdom is a large consumer of gas in several ways with many of its energy demand pegged on gas. The supply of gas, however, remains an immense challenge to the country. This is because numerous factors influence the supply and pricing of gas creating extraordinary inconveniences in the country’s economy. The changing prices of gas usually inflict a lot of pressure on the local economy through pushing up bills for electricity and straining the energy needs. For instance, the nuclear disaster of Japan in 2011 was a significant factor that drove the prices of gas severely affecting the UK economy. This was fueled by the increase of demand for gas by Japan that created sentiment of scarcity. This is just one of lots of aspects that play a function in the UK gas consumption and inherently impact the general economy. This report navigates around the global gas industry, its features and particularly its effects on the vast economy of the United Kingdom. In order to underscore the vast industry and its significance to the economy, the paper will determine the basic problems of the gas industry, market structure, inflation, supply with demand, along with economic enlargement and unemployment. The essence of the report is to expose the inherent implications of the activities and events in the gas industry on the UK economy. The gas industry has several problems most of which induce negative implications on the general economy. The most significant problem with the gas industry is the changing prices that are driven by several dynamics particularly factors of demand and supply. Increases in demand for gas often augment the prices, therefore, pushing up bills for energy consumption. Supply constraints, on the other hand, play a hugely vital role in the rising prices of gas. Additionally, the price of gas in the global market is often pegged on the price of oil. Supply and demand in the gas industry Supply and demand in the gas industry play an enormous role in affecting the process of gas in the United Kingdom, which directly increases the bills for electricity generated from gas power stations. Any slight change in demand or supply of gas, therefore, has a massive impact on the UK economy (Great Britain: Parliament: House of Lords: Select Committee on Regulators, 2007, 56). A clear example is the Japan nuclear tragedy, which led to the plants being taken offline. Therefore, Japan required more gas to meet its energy demands as an alternative to nuclear power. Gas dealers developed anxiety that the gas shipment destined for Europe could be directed to Japan; where there was high demand for natural gas and was being offered high prices. This trader sentiment created apprehensions that augmented the prices that energy corporations had to pay to purchase gas in the United Kingdom. This is the main reason behind high costs in bills in the country in the winter season. Similarly, the conflict in Libya has led to low supply of gas in European markets that imported gas from the North African state thus increasing the price of international gas. As a result, the cost of electricity generation rose pushing up electricity bills. In the United Kingdom, gas and bills are directly related because any changes in gas prices affects electricity bills of energy consumers who use electricity derived from power generators. Therefore, the varying cost of gas is a single dynamic that profoundly affects bills in the UK. For instance, high general price increase the rate of domestic heating as well as the charge of electricity. This has been contributed by the reality that the charge of electricity derived from gas power-stations automatically sets the general cost of energy remitted to all generators. Increase in the international gas fee causes the charges of costs of electricity generation to rise prompting the consumers to pay high bills. This is a terrifically imperative feature of the effect of gas price changes on the UK economy. The interconnection between global gas demand and supply, affecting its price to the bills paid by electricity users is a significant component of influence the gas industry has on the local economy. Market Structure The gas industry has a complex and highly interconnected market structure that denotes the channels of gas in meeting the energy needs of the country. Since United Kingdom imports substantial quantities of gas to meet its energy needs, the market structure involves the gas supplying countries and power companies that purchase gas from suppliers and the final consumers of electricity who pay the bills. This structure is mainly derived from the fact that gas purchased from suppliers is mostly used for purposes of power generation of electricity used in households. As a result, a typical market structure implies that high prices from suppliers push up costs for power generation making the electricity more costly and thus pushing up the bills for local customers. As a result, the international price of gas has a direct influence on the UK economy because the prices of gas determine the electricity costs and the electricity bills. Economically, it is envisaged that buying gas in advance can be an effective way of minimizing uncertain price charges. Hence, by buying gas in advance UK companies can manage to stabilize the price of electricity production and bills. However, it is often asserted by power companies that any slight increase in wholesale price leads to a corresponding increase in the bills. Therefore, the immediate increase of prices by power companies whenever there is a hike in wholesale price has been termed as discriminatory and selfish. This is stated so since high wholesale costs can only affect current supplies, which raise future prices but current prices should be retained because they represent advance supplies. In future, advance purchasing will not prevent higher wholesale prices from affecting bills. Apart from the forces of supply and demand that determine to a great extent the market structure of the gas industry, the aspect of oil is a significant parameter in the gas industry (Great Britain: Parliament: House of Commons: Scottish Affairs Committee, 2007, 63-67). Most suppliers of gas, which are also oil producing countries, peg their gas prices on oil. This practice prevails in the international gas market and influences the prices of gas in an immense way. The United Kingdom does not have many lasting contracts, however, since much of the gas is tied on oil, the price of gas in UK change with the cost of oil. Increases in the prices of oil have been influential in the high bills in the United Kingdom. First was in 2008 when the oil prices increased deriving a corresponding increase in prices and bills. Also during the Libya conflict in which due to reduction in supply of oil from the country, oil prices rose augmenting UK energy costs in a similar way. Hence, the United Kingdom is affected by the high oil prices which lead to hike in local consumption costs. Analysts state that the increment in the spot price has been attributed to high oil prices. Inflation and Economic growth UK needs to import gas from the international market, which makes it obvious for global demand of gas to affect local prices. Unlike other countries with large deposits of gas, UK has to rely on imported gas. Therefore, price increase will continue to be witnessed as several factors in the international gas industry will often affect the prices at home. For instance, prior to the disaster in Japan prices of gas in UK were lowering but when the earthquake occurred prices began to rise. This is a clear indication of the fact that the UK economy is vulnerable to global supply and demand factors of gas, which could affect prices at any time. Just like the northern part of Europe that has local supplies of gas and a slow trend of economic growth, the UK stabilizes gas prices in comparison to Asia. The discovery of shale gas provides better prospects for the future through which demand will be satiated by the increased supply of gas. Furthermore, novel pipelines will be integral in mitigating price increase through high supply. However, for the United Kingdom the future seems uncertain because the creation of gas in the North Sea will decrease by half in the next two and half decades. The UK will be more reliant on imported gas along with the entire Europe and Asia (Great Britain: Parliament: House of Commons: Trade and Industry Committee, 2006, 54). The UK according to analysts should establish lasting deals or expect unusually high prices in the future. This is added by the actuality that the policy of the government treats gas as an alternative to wind and nuclear generation. Additionally, electricity bills could become dependent on the cost of developing nuclear power plants and wind turbines than gas prices. The discovery of shale gas in the United States could be pleasant news since the capacity to excavate the gas has also been explored. This could be significant in augmenting global supplies through the importation of gas from America thus lowering prices. The cost of power will, however, continue being affected by the multitude of factors that include technology, economic fortunes, and earthquakes. Conclusion In conclusion, the gas industry tremendously impacts the UK economy because the country relies on gas imported from international suppliers and any change in demand and supply affecting prices has a monumental impact on bills paid by consumers. This is contributed by several factors that include high demand in Europe, as well as the closure of German nuclear plants in response to Japan’s crisis. Practical events that indicate the country’s vulnerability to the gas industry include the Libyan crisis and the Fukushima tragedy in Japan. In fact, the latter suddenly affected local electricity consumers who had to bear the high bills. The structure of the market entails global suppliers, power companies and consumers and denote direct link between international factors and the local gas prices. Similarly, the aspect of oil plays a pivotal role since most gas suppliers peg their prices on oil. The UK economy will remain reliant on the global gas industry. This is because its local gas deposits will fall in the coming years as Europe’s demand for gas increases, complementing Asia’s high demand. These factors will increases prices for local suppliers. However, the importation of unconventional shale gas from America could help stabilize prices. Bibliography Great Britain: Parliament: House of Commons: Scottish Affairs Committee. 2007. Effects of Tax Increases on the Oil Industry: First Report of Session 2007-08, Report, Together With Formal Minutes, Oral and Written Evidence. London: The Stationery Office. Great Britain: Parliament: House of Lords: Select Committee on Regulators. 2007. UK Economic Regulators: 1st Report of Session 2006-07, Vol. 2: Evidence. London: The Stationery Office. Great Britain: Parliament: House of Commons: Trade and Industry Committee. 2006. Security of Gas Supply: First Report of Session 2005-06. London: The Stationery Office. Read More