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EMEX: will Trump's victory lead to cheaper energy?

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Hydrocarbon Engineering,

Brexit has factored in a 15 - 18% rise in fuel prices next year due to the fall in a value of Sterling. Could a fall in the value of the dollar after Trump's victory offset that rise with a fall in the value of the dollar against the pound?

Immediately after the result, there was a fall in the value of the dollar; this should make energy cheaper, as fuel is priced in dollars, but what will happen in the short to medium term? The scenario that Trump will be a catastrophe to the world markets has led to a short term fall, but the market should calm down after the unexpected shock. The rally will depend on what Trump does rather than what he has said he will do.

The American political system is based on checks and balances. Obama failed to deliver much of his programme because he could not get it past Congress. The Senate and House of Representatives are now both in Republican hands, but the Republican Party itself is not fully backing Trump. It is likely that the wild promises that he has made will meet a wall, past which he will not be able to progress a lot of his agenda. Short term turbulence will settle down. as happened in the case of Brexit, but the underlying risk of a populist President trying to match his unrealistic rhetoric to action, will be a constant destabilising influence on the markets.

This is not scare mongering but based on what has already happened, should households and companies need to factor in a rise in energy costs? Energy prices closely match the ups and downs of Sterling's or dollar's value, really due to an inability of energy companies to absorb the rise of the commodity prices in an already extremely competitive market, which has very little profit margin. To protect themselves, they will need to hedge against the risks, the cost of which will be passed onto the consumer.

Brexit caused the same turbulence with a major drop in the value of Sterling, so why has the fall in the value of sterling, not already been seen in a hike in bills? The answer is wrapped up in the procurement of energy. The majority of the energy bought is gas. Gas provides two thirds of the energy used in the home and businesses, mostly heating, and it also powers over half of electricity generation. Gas is valued in dollars and so logically, prices should already have gone up with the fall in sterling. The reason this has not happened yet is that most gas is purchased up to a year ahead, so the price of the energy we are consuming now is still based on the value of Sterling before the vote. The price of energy therefore has an inbuilt price increase, based on currency exchange rates, which cannot be avoided, but will start to bite later in the winter.

Back to Trump, his victory may lead to the fall in the value of the dollar so will this not lead to cheaper commodity prices? Well yes and no, the exchange rate will have an effect, but the fall in the Dollar may lead to inflation in the price of oil as commodity, producers, many of whom are dependent on oil revenue, will need to increase prices to offset losses on the exchange rates.

Cheap energy is based on stable markets with clearly understood risks. Nobody is sure where Trump is going, maybe not even him, but arguably the most powerful man in the world, making up policy as he goes along is not going to make energy cheaper", concluded Lord Rupert Redesdale, CEO of the Energy Managers Association.

With his team at the Energy Managers Association, he has been working with hundreds of businesses to provide an event, EMEX where energy users can share knowledge, technologies and expertise on how to increase buildings energy efficiency, reduce electricity, water consumption and their associated costs.

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