Gas prices: Enron revisited

Submitted by Matthew on 21 November, 2012 - 10:49

The real significance of the reported rigging of wholesale gas prices is probably different from what has been highlighted in media comment.

In mid-November a whistleblower revealed that gas wholesale prices may have been rigged on 28 September 2011, the last day of the gas-trading year. Comment has centred on the possibility that this price-rigging may have increased households’ gas bills.

The reported price-rigging was to put the gas price artificially lower, and in general it’s unlikely that such price-rigging would significantly increase household gas bills. Much more important for household gas bills, as with some other things — fares, mobile phone contracts — is tricksy retail pricing, which leaves people paying higher rates than they would if they spent many attentive hours analysing the different price schemes and making sure they got the cheapest offer.

The price-rigging would have been done in order to make gains on a derivatives transaction — for example, a contract previously made to sell gas for delivery on 28 September 2011 at a low price.

In its basics the gas industry is simple. The value of the gas is determined by the labour-time of the workers extracting and transporting it. The owners, usually states, of the areas where gas can be extracted with less labour draw a “rent” from the difference between the local cost of extraction and the world-market norm.

In the world of privatised utilities and huge derivatives markets, an army of middlemen steps in, speculating and taking bites out of the profits and rents. The price-rigging probably benefited one middleman at the expense of another.

The reported price-rigging is of the same stripe as the Enron scandal of 2001. Enron made itself into the seventh largest corporation in the USA by slick trading in oil and gas. It channelled gains to its bosses by financial trickery (dodgy accounting in that case, not price-rigging), and then collapsed.

The trading and speculation can push prices up in one period and down in another, as it pushed oil and gas prices up in 2008. It channels a big proportion of the surplus value produced by the oil and gas workers into the pockets of traders in New York, London, and other financial centres.

Those spivs come to think of themselves, and convince others to think of them, as “wealth-creators”. They siphon many of the most talented and energetic young people into their crazy trade.

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