Why Gas Prices, Not Oil, Determine What You Pay for Electricity

Transcript

Uh, but but first, I I I really want to talk about what's happening in energy markets today. I I I don't have to tell anyone listening or watching that they're volatile. Oil is still about above $100. Uh, and given I think some of the the seesawing statements from President Trump in the US and and um responses from the Iranians, uh it's very unclear what's going to happen next. Uh, how is this impacting the energy markets in Europe versus versus the US, which I believe is a little more uh self-reliant? And what like what are some of the big changes or or how's this impacting your business?

Yeah, a great very obviously topical question. And the kind of differences between the UK, Europe, and the US are pretty pretty stark, which you know, you can kind of see it manifest itself on the charts right now. Um, I think one of the big things that you know, we look at broadly is if you think about kind of oil and gas prices, obviously they're they're incredibly, you know, um the the price of oil and gas on markets is incredibly related to to the supply. And you know, most most of that comes through the Gulf and for you for Europe especially. Um, in the US naturally, you know, with the kind of recent shale revolution, the US is is somewhat self-sufficient especially when it comes to to to gas. But I think, you know, one of the big things that we look at is when we're looking at and how it's kind

of affecting our business is that the price of oil actually doesn't really affect, you know, the price that ultimately people pay for their energy, that homes, businesses, data centers, etc. pay for their energy. Um, you know, obviously it affects what people pay at the pump, but um it's it's more through secondary effects that oil has these knock-on effects on on the kind of energy economy. Um, and you know, it's loosely correlated with gas and that's typically due to you know, it's kind of a replacement in some industrial applications. Um, and obviously oil and gas are sourced near one another. But the main effect of oil on kind of power markets and energy markets in general is secondary due to, you know, inflationary effects on on logistics. Um and obviously that's been, you know, hugely impacted with the the

recent developments in in the Middle East. Um the kind of more kind of pertinent thing around energy markets, you know, for us in our business is is the price of gas. And it's a totally different story because gas directly influences the price of electricity that people pay. It's the kind of primary fuel that goes into your combined gas turbines, which makes up a third of the fuel mix in both the UK and the US. And the way that energy markets are structured and the the kind of price discovery mechanism on energy markets is very heavily indexed with the gas price.

So what that means is when there's supply disruptions to um the LNG around the world, what you see is a direct impact immediately almost on the the price of on power markets. And in terms of the kind of US versus Europe UK comparison, the Europe is very is a heavy importer of of gas. And and typically what happens is that you have seasons where there is injections into gas storage facilities. That typically happens over the summer.

And then you've got seasons of withdrawal from those storage facilities. And obviously naturally, you know, during the injection season, which is now coming up, the the the price kind of, you know, worldwide of gas and heavily influences, you know, ultimately the costs that Europe is paying. On the flip side, US is with the recent shale revolution fairly insulated, as we've kind of seen a little bit um on on the gas side of things. And that is going to be something to watch over the next few years, though.

And the reason for that is when you look at there there's a certain decoupling between the Henry Hub price, which is the price that the kind of standard price of gas in the in the US, and the kind of the the price of GTF, which is the kind of European UK index. Those have somewhat decoupled because um you the US, because it's such a recent market, is slowly still ramping up its export capacity. Which means that right now there's this decoupling, but we do expect that decoupling to actually decrease over time. Um and the kind of consequence of that is right now there's quite a quite a lot of insulation for the US market. Um but not at all for the for the UK market.

But that decoupling, you know, as I kind of said, will look to to converge over time. But um yeah, ultimately when it comes down to our business, it's it's the price of gas and the flows and the kind of status of the storage facilities around Europe, because that's where we're operating right now, is what really influences what we're paying and then ultimately what customers are paying at the end of the line. Got you. And and maybe just a sort of again um paint a picture for everyone watching and listening. Uh $100 barrel for oil sounds moderately scary, 150 um is very worrisome, $200 is is downright terrifying and and that could lead us into stagflation territory. Um could you um sort of put natural gas prices in in in those

terms? And and I know I mean just I'm I'm not an energy expert, but uh it's easy to remember especially during the Russian invasion of Ukraine from 2022 on, um sanctions put on on Russian energy exports. And and nowadays people are talking about the the closure of the Strait of Hormuz. And and while some um like oil processing plants have been shut down and it might take months for them to start up if and when this conflict ends, um the strait could reopen immediately theoretically. Whereas uh Iran's attack on on uh Qatar's like big processing and export facility, I believe knocked off 20% of its total capacity. And Qatar is a huge um LNG exporter. Uh that could have much more permanent effects from what I could tell. So, how does that like again, put

a pic kind of a long question, but like what are the prices right now and how is that actually directly impacting customers and and then again like because of this like big attack on the infrastructure, what challenges will that present moving into the future? Yeah, so I mean right now the the price of gas is basically about um 50% above 50 to 70% above the kind of usual um price that was kind of we would expect um around this this kind of year. And you know, ultimately that is down to you know, the obviously the disruption to the Strait of Hormuz.

And you know, when we kind of look at it like beyond just crude and LNG, you've got like disruption further to um you know, not just gas prices, but a bunch of other prices as well, right? So, for instance, 30% 34% of global fertilizers come through the Strait, right? There's also effects. So, that's that ultimately affects food um and then also you know, kerosene is mostly sourced out of Qatar and Strait as well. So, that obviously influences the price we pay for jet fuel. Um further effects on that is like there's about a a quarter of the world's uh sulfuric acid comes through the Gulf.

That is needed for things like explosives, which is obviously very uh hot and topical right now and also you know, refining things like copper, which is essential input to many things including a lot of inputs in the energy industry. So, as a consequence, essentially right now what we're looking at is gas prices are, you know, quite like like fairly elevated, probably not as aggressively elevated as as what we've seen with with with oil um and not quite as aggressively elevated as what we've seen through the Russia-Ukraine crisis. And that is in part because you know, especially in Europe, there's been a lot of measures taken since the 2021 crisis to kind of you know, obviously mitigate the the serious effects that our crisis had in

causing you know kind of the disruptions in the energy markets back back in 2021. And so that said like essentially what we're seeing is right now we've seen an increase and but not as aggressive as what we've seen in the past. But however, one of the big issues that you know uh that probably a lot of our listeners have seen is that you know this this disruption and this attack on the facilities themselves. These are multi-billion dollar facilities that take decades to build and a very long time to repair. So the the long-term disruption is something that I feel like isn't fully being factored in right now.

And people you know view that okay look this is a short-term thing. We'll see a taco and then you know prices will return to normal. But in fact you know what we what we're not really recognizing what I kind of think that you know a lot of markets aren't really recognizing is that there are these really severe long-term effects on global supply. You know that that they're going to percolate and last for quite a few years.