With over 100 years of experience in the fuel industry, we believe there is no question or problem that Portland cannot answer or help you solve. We want to hear your questions and issues with regards fuel buying, fuel quality, fuel consumption, petrol forecourts, grades of fuel, refining etc, etc, etc. The list really is endless and we would like you the fuel user to test us so we can help you!
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December 19, 2013 Is LPG the same as normal mains gas? And is “normal” gas the same as LNG? Please help – there are too many names….!
No shame in being confused Margaret. Only today, I went to buy my wife some face-cream from our local Department Store….Never again.
First things first, LPG stands for Liquid Petroleum Gas and is not the same as “normal” mains gas. It is heavier than air and therefore sinks to the ground, whereas mains gas is lighter than air and rises upwards under normal atmospheric conditions (and therefore presents a much greater risk in terms of gas leaks). LPG is composed primarily of propane and butane, while natural gas is composed of the lighter methane and ethane. LPG has a higher calorific value than natural gas, which means it gives off more energy (heat) but also tends to mean that LPG is more expensive.
There is also a lot less LPG around. This is because LPG is derived from refining oil (hence Liquid Petroleum Gas), whereby the lightest and most flammable components of crude oil rise to the top of the Distillation Tower when heated (just imagine filling a massive kettle with crude oil and then boiling it). LPG is the first crude oil component to evaporate off, whilst petrol and kerosene (jet fuel) will also rise to the top of the mixture (but will not evaporate). At the same, heavier grades of fuel such as diesel and fuel oil will sink to bottom of the mixture.
On the other hand, Natural Gas is gas that is extracted directly from underground rock formations. Like crude oil, it is formed when layers of buried plants and animals have been crushed by extreme geological pressures over thousands of years. Often, natural gas sits on top of coal deposits and sometimes can also sit on top of existing oil reservoirs. Before it can be used as a fuel, natural gas must be purified and once this is done, it is typically pumped into the gas main (hence “mains” gas).
Transporting mains gas is extremely cost effective (once the pipelines have been constructed), which is why Western European Countries invested in huge gas networks in the 60’s and 70’s. However, the beauty of LPG is that it can be used where no mains gas networks exist – so in the UK it tends to be a central heating fuel in rural areas and in the developing world, it is used as a heating fuel for both hot water and cooking. LPG is also a much more diverse and useful product than natural gas, in that its uses range from camping gas stoves to aerosol propellants (where it has replaced o-zone depleting CFC’s) and of course in cars as Autogas.
Finally, answering your question on LNG; this is the same as natural gas, but it is gas that has been cooled and liquefied for transportation purposes (hence Liquefied Natural Gas). So whereas, natural gas extracted in the North Sea is simply pumped into a pipeline under the sea and then transported by that pipeline into the UK’s gas grid, natural gas in (say) Qatar is extracted and then liquefied, before being pumped onto a ship and sent to an import facility in (eg) the UK, where it is pumped into the mains gas grid.
As central heating systems across the UK started to go into overtime, we had this question from Margaret in Sutton.
October 14, 2013 The news commentators and politicians keep on referring to the California black-outs as a reason that fixed prices are not workable. What was the situation there and when was it?
Another good question, although we would say the link between Ed Milliband’s energy proposals and the California black-outs has been over-played. The California energy crisis took place in 2000 – 2001 and was caused by questionable / fraudulent activity on the part of Enron, who were selling electricity to the Californian utility companies. However, the latter had not hedged their exposure, so that when Enron pushed prices up by a factor of 10 (by physically restricting the market), the utility companies could not pass these increases on to the consumer. The reason they could not pass the costs on – and here is the link with Milliband’s proposals – is that the utility companies were limited by the Californian State as to what prices they could charge. The result was that costs for the utility companies rocketed and with no ability to charge consumers for the higher prices, they simply stopped supplying electricity – leading to wide scale black-outs and power failures.
However, if the electricity companies had hedged in the first place, the rise in costs from Enron would have mattered less (or not at all) because then the hedge would have paid out on any cost increases. So in theory this situation should not occur in the UK, as long as companies hedge correctly. But then again – on the basis that the Government could not force the utility companies to hedge – the risk of this happening in the UK might be remote, but would still be a possibility.
October 4, 2013 I realise that gas and electricity are not your main areas of expertise, but what chance of Labour's 'energy price freezing'
Not our main areas of expertise as you say Simon, but we still fancy our chances against the policy makers! Our guess is that this idea will never see the light of day (even if Labour win the election in 2015), largely because of its radical nature, the significant opposition from vested interests and the legacy of previous government interventions in business activity.
However, if the question is whether the policy is ‘doable’ (rather than ‘will it be done?’), then we don’t see that it is very difficult to achieve at all. Let’s look at a few key facts:
– The process of Price Hedging in order to fix prices is ubiquitous across all energy sectors and the key players partake all the time
– Forward contract “strips” of 12 months are very common, positions of 3 years + are not unusual, and the Futures Markets even allows positions up to 9 years forward to be taken
– Most utilities trade wholesale gas and oil on the wholesale markets and then use derivatives (futures, swaps & options) as insurance against price volatility
– At any given time, all utility companies will have hedged at least some of their forward consumption and / or sales
– How much they have hedged is a function of how pro-risk (or risk averse) they are, ie, do they hedge 100% and lock in all profits / costs or do they hedge a smaller portion, leaving them free to speculate on market movements?
So all of the above tells us that the mechanisms are in place to achieve Ed Milliband’s goal and that there is no practical reason why the utility companies cannot provide a fixed energy price to UK consumers. Forward derivative contracts would be taken out (be they on electricity, gas, coal or oil) for the 18 month period proposed and for the volume that is supplied to UK customers. Then the energy companies would decide how much margin they want to add for UK sales and away they go.
The idea that infrastructure investment in the UK will cease as a result of fixed prices seems bogus, although it might be based on the fact that a fixed margin on UK sales may not generate enough profit versus the current method of generating income based on speculative activity. This is a moot point of course, but it is worth reiterating that selling energy on a fixed price basis does not lose the energy company money (as long as they have a forward hedge in place), but it might not make them as much money as speculative trading, the (increased) profits from which could be then used to reinvest in infrastructure. That being said, as hedging providers ourselves (on fuel), we would have thought that one of the energy companies would see this ‘fixed price’ debate as a great opportunity to present themselves as the ‘honest’ party by offering fixed prices to consumers before it becomes mandatory (or not) and increasing their customer base in the process.
Finally though, a cautionary point before anyone gets too carried away with the idea of fixed prices. Hedging the price of gas or electricity does not bring prices down per se and nor does it fix prices in perpetuity. A fixed price simply holds costs steady for a certain defined period (eg, Milliband’s 18 months) and removes price volatility. At the end of the fixed price period, a new fixed price has to be set and if wholesale markets have gone up in the meantime, that new fixed price will obviously be higher than the previous one.
This question came from Simon in London (Oct 2013).
July 17, 2013 Complex question - in your last Oil Market Report, you suggest that the big oil companies do not manipulate prices but I have to challenge this. Isn't it possible for the big players to buy oil in attempt to drive prices up, only to exercise sell options or swaps to drive the market back-down before buying it back again. Surely the oil company would be guaranteed to make money? (told you it was complex!)
We’ve received quite a bit of correspondence on the back of our May and June Oil Market Reports, where we suggested that the latest EU investigation into oil price fixing was going to be a damp squib. Certainly the most complex question was this one from Jonas in Stockholm (we are so European now) and we conclude that people in Sweden must be very clever indeed. You may also be interested to know that a recent BBC Radio documentary on oil price fixing also highlighted this possible practice.
Probably the first confusing factor here is that companies can actually make money from a falling market by selling oil that they do not actually own. They do this by purchasing a sell swap (or option) – a mechanism whereby the company is paid if the market falls. They are typically used by oil producers and sellers who, for example, have refined or bought a large amount of oil to sell into the market. Obviously the worst thing that can happen to an oil seller is for the price to fall, so they will purchase a sell swap, whereby if the market falls (and they have to sell their product at a lower value), they will get paid. In short, it is an insurance policy for the seller.
The principle of a swap is that, like buying or selling oil, the amounts paid depends upon volumes bought. So for example, if a sell swap is in place for 1,000 barrels and the price falls by $10, then the swap pay-out is $10 x 1,000 = $10,000. If the swap is for 100,000 barrels, then a drop of $10 will now pay out $10 x 100,000 = $1,000,000.
So the principles that you are alluding to here Jonas are all about the big players – already buying large quantities of oil (either physically or via paper derivatives) – who can impact prices because of their scale. The scenario would run as follows:
- All Evil Oil Corp goes to the market and physically buys 400 Million Barrels for delivery at an agreed point in time. This is a very large amount of oil and only the likes of All Evil (and other big commodity houses) can make such a play, because they are in the business of buying oil and are the only ones with credit lines in place to make such a transaction.
- On the back of such a huge purchase, the rest of the oil market gets a bit spooked – after all, when All Evil make a move, the rest of the market tends to follow. So everyone starts buying oil and the price goes up.
- At this point, All Evil plays its master stroke and promptly sells 800 million barrels via a sell swap and immediately the market tanks downwards, because the rest of the trading community realises that this was all a ruse.
- The result is that All Evil starts making money because even if the price retreats back to the starting point, the volume on the sell swap is double that of the buy position and therefore the pay-out to All Evil is 2 to 1 (i.e. for every barrel paid out on the buy position, 2 barrels receive an income on the sell position).
So there you have the theory Jonas and yes it is mathematically possible. But there are a few problems with the theory, namely:
- People will (always) be disappointed to know that there are very few (if any) players of sufficient scale and reputation to actually move a market in this way.
- Secondly, the impact on the consumer is actually negligible, if not in their favour, i.e. either the price goes back to the starting point or possibly will fall even further because of the larger volumes involved in the sell positions (and remember, the more prices fall, the more money All Evil make). So the consumer price is not affected – certainly not upwards and probably not at all, because all of this will occur over a period of a few days (hours even), which is far too small a time-scale to impact petrol stations that may be 2-3 weeks down the supply-chain.
So in the example given (which we should stress, is only hypothetical) yes, price manipulation is taking place, but not exactly what the EU investigators and the media had in mind when they took the oil industry to task.
Portland doesn’t believe that this type of stuff actually happens very often in the real world because, quite frankly, there are far easier and less convoluted ways of making money in a volatile commodity market. The process outlined is also risky (very) and could easily backfire. What would happen to All Evil, if Iran were to block the Straits of Hormuz, just when the sell swap volume is placed? The price will sky-rocket (because of the Hormuz situation) and All Evil will end up being All Knackered as the sell position on the 800 million barrels goes against them.
An alternative price fixing scenario and indeed one less financially risky to the oil companies is that they might try to bid up prices via the pricing platforms, only to withdraw their spurious bids at the last minute. This would certainly benefit oil producers or those with oil to sell, but the pricing agencies watch this kind of behaviour like a hawk and the risk here (of being black-balled by other market participants), far out-weighs the benefits of a couple of spurious bids. Also, spurious bids in the really major markets (i.e. crude) are nigh on impossible to pull-off. Indeed, if anyone knows how to bid for 150 million litres of crude oil, then not actually buy it but still appear to load it onto a non-existent ship – well, presumably they will be the next Bond villain!
This question came from Jonas in Stockholm
March 1, 2013 I was reading your September 2012 Oil Market Report and am not sure your VAT figures are correct. Surely a 5 pence per litre rise on 25 billion litres would give an increase in VAT revenue to the Government of £250m – not the £100m you state?
That is attention to detail Nick, although not much of a question for those of you who don’t care much for figures! In fact the £100m figure we state is correct; it’s just we didn’t fully explain in the report why. So here’s the reason; the Government can only raise VAT on non-commercial diesel purchases ie, diesel that is purchased by the consumer (individual), whilst all VAT raised on diesel sales to business is claimed back by that business. So therefore, only VAT on sales to to private individuals raises money for the Government (excepting the Value Added Tax element on the sale margin – get a VAT tax expert to explain that one).
So if we look at diesel in the UK, we can see that total consumption sits at 25bn litres per annum. But of that volume, only about 40% is sold to private users (where VAT payments are not claimed back and thus go to the Treasury). The remaining volume (about 14bn litres) is bought by business and is therefore claimed back from the Government. So £250m would be raised if all diesel sales were to private individuals. Instead, only 40% of the figure is raised this way and 40% of £250m is…(hey presto) £100m. Nonetheless, good spot. You must have paid attention in Maths at school.
This question came from Nick in Weybridge (Mar 13)
February 28, 2013 Do you think that prices will fall when sanctions on Iran are dropped and product released? Won't there be a product glut?
Yes – logically you would think so Anthony. Let’s look at the facts first. Up until sanctions were levied, Iran was producing around 3.62 million barrels per day (bpd), was the 2nd largest producer within OPEC and has (according to some estimates) the largest reserves in the world. So to suddenly shut that off from the supply-chain has undoubtedly affected prices upwards. Reverse it and we should see the process reversed and prices driven downwards.
However, 2 possible spanners in the works. Firstly not all production has been shut-out. In fact, Iranian crude is still flowing relatively freely to both China and India – how much we don’t fully know, but possibly up to 3m bpd is still being exported from Iranian facilities. So there may be less product to release onto the wider world market when the sanctions are lifted.
Secondly and perhaps more relevant to prices at the present time is that sanctions look unlikely to be lifted. Unusually for a sanction process, they do seem to have worked; Iran’s financial status is increasingly weak and the ability to import foreign goods is a particular problem. Furthermore, with the current boom in US oil production, it seems that the world – and in particular the USA – has become accustomed to surviving without Iranian crude. Therefore, we see a willingness in the West to prolong the sanctions and play the long game, whilst at the same time, the Iranian leadership seem unlikely to return to the table for dialogue, until a few more degrees of economic desperation have been reached.
This question was asked by Anthony in London (Feb 13)