A little more than a year ago, the oil price was touching $150 a barrel and the shock waves were being felt throughout the global economy.
Indeed, there is a respectable school of economic thought that maintains that the rise in energy prices during 2007-08 was the major contributor – rather than the crash in the housing market – to the recession that followed, first in the US and then around the world.
At that time, I was among those calling for regulatory action in the New York market to curb the speculation that contributed at least one-third of this price spike.
While opinions differ on the degree to which various factors contributed, the role of futures trading on NYMEX (New York Mercantile Exchange) came under unprecedented scrutiny as a result of these extraordinary price increases.
Even then, there was little prospect of such interventionist policies being implemented in a market that vigorously safeguards its independence from regulation.
But a lot has changed in the US under Barack Obama, and I was pleasantly surprised to note that its main regulatory body is now promising the kind of intervention that could avoid a repeat performance.
Gary Gensler, chairman of the Commodity Futures Trading Commission – an Obama appointee – said recently that he wants limits on the “futures” stocks that traders can hold in oil&gas, just as there are with agricultural commodities. The arguments that justify intervention in the food markets also apply to energy, said Gensler.
Interestingly, he also signalled an intention to impose limits on the lightly regulated, but rapidly growing, carbon-trading market before it, too, becomes the focus of speculative activity that has absolutely nothing to do with saving the planet, as opposed to filling the usual coffers.
And who could disagree with any of that? Excessive energy prices may inconvenience developed economies, but they cripple poor ones. The idea that this can result not even from genuine market conditions, but from stoking up futures prices for vast profit is obscene; just as bad as forcing people into starvation by driving up the price of food.
Last year’s sudden and dramatic rise in prices also confirmed the need for tougher regulation in our own energy economy.
The results announced in recent months by utilities that rushed to increase prices on the back of the rising oil price confirm just how opportunistic they were at that time. And what went up has not come down to anything like the same extent.
Our regulator, Ofgem, eventually got round to noticing this last month, and the chief executive, Alistair Buchanan, wrote a letter to the six big utilities asking them to explain the fact that prices have fallen by less than 10% in 2009.
“You owe it to consumers ahead of the winter,” he somewhat less than thundered, “to explain how cost changes, including falling wholesale costs, are likely to bear on future energy bills.”
In a notably brazen response, the Energy Retail Association, representing the utilities, replied: “Customers have been protected from the massive rises in wholesale prices last year; price rises were not fully passed on at that time.”
Well, you could have fooled me – though not as easily, it seems, as they can brush aside Ofgem.
The Energy Retail Association also threw in the now standard line about the vast investment that their members are expected to make in new-generation capacity.
It seems to have become an accepted wisdom that this capital investment – the requirement for which has been apparent for years – is to be paid for through what is, in effect, a surcharge on consumers.
All of this is taking place in an environment where the oil price came tumbling down to $30 a barrel before rising to its present position in the $60-75 range.
The question that would be concerning me if I were still a UK politician is what happens to utility and forecourt prices once oil starts edging up again, as it surely will, to around $100 or more?
I have not the slightest doubt that these increases, too, will be passed on to the consumer as if the events of the preceding couple of years had never happened. And that trend might well kick in just around the time of next year’s general election.
Ministers – and I was one once – would be well advised, at present, to lay aside the “lines to take” that are provided to them by the civil servants and which will always recommend non-intervention in energy markets.
They should be less interested in defending the companies than in ensuring that consumers are getting a fair deal.
Maybe, as so often, they will be emboldened to be a little bit more radical by what is happening in the US.
If rising energy prices were a prime cause of recession, then falling energy prices should be a crucial route out of it. And if US regulators can see the need to challenge wholesale energy price movements then it should not be beyond British regulators to be bolder in tackling retail ones.
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