High gas prices for the decade

GAS prices are set to stay at historic highs for the rest of the decade, Britain's major North Sea producers warned today.

It also emerged that the collapse of energy trading giant Enron is being blamed in part for the soaring gas price.

And private industry criticism is emerging that energy regulator Ofgem may have contributed to keeping the gas price artificially high by spooking the market over fears of price-rigging.

In a warning to British industry and the economy, a major report into the gas market commissioned by the UK Offshore Operators Association (UKOOA), reports that Britain's major energy producers expect the price of gas to hit and remain at long-term highs until 2010.

Its report concludes that the single major factor in the movement of the gas price is its historical linkage to the oil price.

The report by independent consultancy ILEX concludes that as the oil price is likely to stay above $30 a barrel until 2010, the gas price over that time will remain above 30p a therm or even 35p a therm.

That compares with an average gas price of around 20p a therm in the first half of the 1990s, 15p a therm or less during the second half of that decade, and prevailing spot prices in the immediate open market of around 25p.

But the ILEX report also reveals two further fundamental reasons for the inflated oil price.

The first is the demise of Enron and its European energy trading rival Dynegy.

According to UKOOA executive David Odling, Enron and Dynegy traded the market aggressively often 'short selling' gas prices to make a profit.

Their departure from the British scene after their respective financial woes not only took out a key downward pressure from the traded gas market but also coincided with an as-yet unreversed increase in spot and forward prices.

ILEX also concludes that negative market sentiment among traders about dwindling North Sea gas supplies is helping to inflate prices.

But according to major producers negative sentiment is, in part, Ofgem's fault.

One senior industry executive said: 'Ofgem, through its continued investigations of alleged market rigging, has done nothing but stoke fears. It certainly has not helped itself or the market.'

Economists are slashing their 2005 growth forecasts as sky-high oil prices eat into consumer demand.

Morgan Stanley and JP Morgan are the latest Wall Street banks to warn that soaring energy costs are hampering the recovery. Morgan Stanley lowered its global growth forecast for next year from 3.9% to 3.6%, warning there may be 'more cuts to come'.

The mounting pessimism looks to be putting a lid on oil's rise. Today, US crude edged up five cents to $53.34 a barrel, well down on Monday's $55.33 record high.