Home gas bills to soar as oil link strengthens

Gas prices are going to be more strongly influenced by global oil markets for the foreseeable future and householders will have to get used to spending much more on energy unless the surge in oil costs is reversed, Eclipse Energy Group said.

Consultants Eclipse said in a report, commissioned by the biggest household energy supplier Centrica, that the link between oil prices and wholesale gas prices will get stronger over the next few years as declining output from the North Sea makes Britain rely more on imports.

"With the UK increasingly reliant on imported gas by pipeline and liquefied natural gas, the international oil price will, in the near future, be the main price driver behind our energy supplies, with an impact likely across consumers, businesses and the economy generally," John King, Managing Partner of Eclipse, said.

"Domestic users have to adjust to higher gas prices and prepare for a future where energy costs (both gas and power) will account for a more significant portion of the household budget," the report, issued on Friday, says.

When Britain produced all the gas it needed from the North Sea the price of the fuel used to heat most British homes and fire many power plants was not strongly influenced by European prices - which have traditionally been linked to oil.

Now it must compete with European buyers for gas transported by pipeline or bid for tanker loads of liquefied natural gas in a global market where prices are also often linked to oil.

The drop in UK output in the last few years has coincided with an unprecedented surge in global oil prices which, despite dropping more than $10 a barrel this week to around $133 on Thursday, are still twice as high as a year ago.

With oil at $140 a barrel wholesale gas prices in the UK could fluctuate between about 70 pence per therm in summer and 110 pence in winter over the next few years, the report says.

If Centrica, which owns British Gas, and its competitors pass on the full wholesale increase, their customers would see gas prices rise from about 90 pence to 140 pence per therm - driving average annual gas bills up from around 600 pounds to over 1,000 pounds.

EFFECT ON POWER

Bills will grow if oil prices climb further and the knock-on effect on electricity prices could be similar, the report says, adding that energy costs across Europe will also rise.

Energy suppliers in Britain passed on increases in wholesale costs seen late last year when they hiked retail power and gas prices by around 15 percent in the first quarter of 2008.

Wholesale gas and power prices have kept rising, with oil up nearly 40 percent since the start of the year, and suppliers are expected to announce further steep increases soon.

A report published on Wednesday by Cambridge Energy Research Associates (CERA) also warned that the price of gas - which accounts for a quarter of all the energy used in the European Union - would remain tied to oil as there is no reliable and transparent alternative to oil-indexed gas pricing in Europe.

"This explicit oil and gas link will keep gas prices in mainland Europe high for the foreseeable future," said Shankari Srinivasan, CERA managing director for Europe.

"That will likely cause similar price levels in the United Kingdom due to the country's need to import gas from continental Europe or from sources that have the option to sell it there."