Gas prices are low – why aren’t energy prices falling?

Part of the syllabus: Microeconomics
Source: The Telegraph
Date of the article: 2016-04-13
Link to article: Falling gas price effect on the energy market
This is an IB Economics Microeconomics IA article. It talks about falling gas prices and tries to discuss reasons why that lower gas price does not translate to lower utility bills. There must be plenty of microeconomics in this…

Possible talking points:

  • The article mentions 2 economic reasons for falling gas price: higher supply and lower demand. That might be a good start of your economics internal assessment: a diagram showing the changes in supply/demand. Also, it would be possible to quote the article at this point to briefly show that your analysis is well connected to the topic. It is also a good chance to use exact prices on your diagram as these are provided in the article.


  • To analyse the reasons of why utility bills are not falling as quickly you could use theory of the firm. Think about which market structure would best represent the gas market. Using a diagram to illustrate your analysis is a compulsory!


  • There are different reasons in the microeconomics ia article: you could briefly discuss the statement that gas prices are around 56% of the cost of providing gas. Could firms also need abnormal profit to invest into the network of providing gas to households?


  • What about government legislations? Like investing into renewable energy etc.? Could lower gas prices be offset by that required investment? How is that affecting the MC (marginal cost) curve?


  • A very important point also mentioned in the microeconomics ia article is that gas suppliers stock up in advance. What are the economics behind? Trying to hedge (protect themselves) against possible future price increases and to have the ability to provide stable energy price. To evaluate: is this a good strategy for the firms? What about the consumers? Are they benefiting from a stable energy price right now? Or would they benefit more if the price of gas would have increased?
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