By Paul Homewood

It is a general consensus nowadays that gas prices are “high” and this is why electricity prices are also “high”.

But exactly how “high” are natural gas prices?

We all know of course that natural gas prices spiked just before the Ukraine war started, but they also fell back rapidly during the following 12 months or so.

In June this year, according to OFGEM, wholesale gas prices were 86.28p/therm, compared to 46.10p in January 2015, an increase of 87%. But we have also had something called inflation in the last ten years. Since January 2015, RPI has risen by 58%, so the real increase is much smaller than supposed:

The following chart takes out the inflationary effect and shows some very interesting results:

As we can see, real prices this year are no higher than they were in 2018.

As with all commodities, gas prices are always volatile, following the vagaries of supply and demand. Prices fell sharply in 2015 and 2016 as a result of a glut of supply. You may recall the price spikes between 2012 and 2014 when demand exceeded supply. That led to wells reopening and a glut, the seemingly never ending cycle we see in markets like oil and mining.

Prices obviously dipped to ridiculously low levels during COVID lockdowns as demand evaporated.

But ignoring COVID and Ukraine, current gas prices are not excessive by historical standards, and therefore cannot explain why electricity prices are so high now.

Tomorrow I’ll do the same exercise with electricity markets.