THREATS TO INCREASE ENERGY PRICES SHORT AND LONG TERM

Transcription

1 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 2 nd half of 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). 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 here for today s Weather Channel Bulletin on the current weather in the tropics. Inflation 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.

2 Click here to see a chart outlining the impact over the past 30 months as a result. 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 % 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 de-regulated 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 Natural Gas is the most closely related commodity traded on the NYMEX to 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 3 rd /4 th 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 environment-friendly. 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 here). 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.

3 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 invested 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.

4 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 3 rd QTR 2011 through 3 rd Qtr 2012 and beyond are examining options available now as well. Mark Hoover Senior Energy Consulting Manager Consumer Energy Solutions

5 2011 Consumer Energy Solutions. All Rights Reserved.