Threats to increase energy prices short and long term
As discussed in a recent CES energy update energy prices increased in 2010 by 17 % after reaching 7 year lows in 2009 due to
the recession. Energy prices are continuing to firm as we move into the 2nd half of 2011.
Here are the areas of concern surrounding energy (electricity/natural gas) rates available:
Weather
The recent record-setting heat waves that have gripped much of the nation have created tremendous increases in demand for
electricity. This will likely place upward pressure on rates available in the 2 nd half of 2012 as we move deeper into the summer
demand period.
An additional weather related concern is the beginning of Hurricane season. This year’s storm forecast (see NOAA outlook
below) predicts above-normal activity including 3 to 6 major hurricanes (Category 3, 4 or 5).
http://www.noaanews.noaa.gov/stories2011/20110519_atlantichurricaneoutlook.html
As we saw with Hurricane Katrina as well as subsequent storms the following year once storm enters the Gulf and disrupts
production energy prices can skyrocket in a very short period of time (see Natural Gas graph below 2005). The recent tropical
storm Don did not even reach hurricane status and disrupted oil and natural gas production in the Gulf by an estimated 12 %.
As the tropical depressions move off the West Coast of Africa and develop into Cyclones speculators utilize this threat to drive
up prices. As we have seen once a major storm enters the Gulf electricity and natural gas rates begin to run quickly.
The next 3 month period is an extremely volatile time for both weather and energy prices.
In fact, click on the link below for today’s Weather Channel Bulletin on the current weather in the tropics:
http://www.weather.com/outlook/weather-news/news/articles/weather-stories-this-week_2011-07-31
Inflationary
The continued weakening on the US dollar coupled with the dramatic increase in crude oil and gasoline prices has created
additional upward pressure on virtually all goods and services throughout the United States.
Attached is a chart outlining the impact over the past 30 months as a result.
After two years
1.pdf
Gasoline prices impact prices on virtually everything transported to include food and textiles. Fruit and vegetable prices alone
have nearly doubled in the last 18 months as a result. Clothing prices are up 20-25 % from just one year ago.
The Speculative market run in 2008 when oil reached $ 147 electricity and natural gas rates hit near record levels in every deregulated state (see Natural Gas graph below 2008). If your business was not protected with a fixed rate program you were
subjected to these extremely high energy rates.
Depending on where you were located and if your business was not protected by a fixed rate program during the late summer
of 2008 you saw your rates virtually double overnight.
Natural Gas prices
As you can see below Natural Gas prices have remained low since the economic meltdown late in 2008. Natural Gas is the
most closely related commodity traded on the NYMEX the wholesale electricity rates. A large percentage of electricity
generation in the United States comes from natural gas plants.
We have concerns regarding NG prices moving into the 3rd/4th Qtr of 2011 and beyond:
1) Current administrations focus on continued efforts to increase NG generation of electricity.
2) Increased efforts to move away from the much cheaper generation that comes from coal as it is less environmentfriendly. US coals exports actually have recently reached record levels as a result.
3) Increased scrutiny on nuclear generation and its safety has caused continued delays on multiple nuclear generation
projects throughout the US energy sector.
4) Continued concerns regarding the cost and environmental impact surrounding shale extraction techniques.
Additional concerns surround recent acquisition activity by major players in the energy industry (see recent article below).
http://www.chron.com/disp/story.mpl/business/7581756.html
“Exxon Mobil placed a bet on Natural Gas by paying $29 billion for XTO Energy last year making it the largest natural gas
company in the US. It now owns more natural gas than oil.
Exxon predicts that natural gas will be the fastest-growing energy source, overtaking coal and ranking second only to oil in total
use by 2020.“
The major players are betting that there will be a fundamental change in favored fuel source to generate wholesale electricity
generation in the near future. Exxon Mobil feels so strongly in the future on natural gas as a preferred fuel source (and its
subsequent increase in price) that it has investested tens of billions of dollars in source and infrastructure purchases that have
yet to pay off. Exxon is willing to compromise (current) earning losses in favor of much larger (futures potential earnings.
Are you willing to bet against Exxon Mobil and the other major energy producers?
Geo-Political Event
Unfortunately in the world today exists the ever-present danger of a geo-political/terrorist event that would have a major
effect on wholesale prices almost immediately.
As we approach the 10 year anniversary of September 11, 2001 we are reminded of this as an ongoing threat to our energy
infrastructure as a major target for these terrorist groups throughout the world.
This has outlined why virtually all Mid to Large commercial/industrial energy users are examining price options currently and
managing their energy in a pro-active fashion.
Here at CES virtually all of our clients under contract 3rd QTR 2011 through 3rd Qtr 2012 and beyond and examining options
available now as well.