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Natural Gas - Electricity

The energy industry has experienced unprecedented volatility over the last decade.  Crude Oil soared from about $20/barrel in 2002 to a record high of $147/barrel in July of 2008. In addition, natural gas prices increased 400 % (see graph) between 2002 and 2009. Electric market prices have also experienced similar volatility.  Of late, the energy markets have dropped due to the worldwide economic slowdown creating an excellent opportunity to lock prices for the long term. 

There are a number of conditions which have created volatility in the energy markets.  Below are just a few:

  • Energy Trading: Energy markets have become extremely volatile because of a huge influx of investment capital. Ten years ago, market participants were made up of 70% Commercial (those involved in the production, distribution or consumption) and 30% Non-Commercial (Banks, Hedge Funds, etc.).  According to information presented in government hearings in the summer of 2008, that balance has changed to 29% Commercial and 71% Non-Commercial.  This huge imbalance of consumers to speculators created an opportunity for extreme volatility. In addition, the downfall of Enron started a chain reaction in the industry.  Many traders and producers of natural gas have been found guilty of price manipulation based on incorrect supply information provided to the government reporting agencies.
  • Weather: A large portion of the US Natural Gas and Crude Oil supply is produced in the Gulf of Mexico.  Hurricanes Katrina and Rita devastated the Gulf in 2005.  It took producers months to repair/ rebuild these Gulf production facilities.  The production drop off caused panic prior to winter and consumers saw their natural gas cost nearly double.    Severe cold weather snaps increase heating demand which causes a strain on supply levels as well.
  • Supply and Demand: In recent years the supply and demand balance of Crude Oil and Natural Gas in the US has been considered tight.  A few short years ago, strong growth in the economy, booming new home construction, Industry expansion and natural gas burning vehicles have all helped fuel demand growth.  One source of increased demand that typically goes unnoticed is the natural gas fired electric power plant.  Natural gas is one of the cheapest and cleanest methods of producing electricity available.  Natural Gas electric power plant construction has taken off over the past 15 years while Natural Gas production has remained mostly flat.  Visit www.eia.doe.gov for recent supply and demand reports as well as a wealth of additional information.
  • Oil Prices: Natural gas is a derivative of Oil and has a direct relationship with the cost to heat homes and businesses nationwide. Recent prices reached levels over $140 per barrel. Prices that were unheard of prior to recent market conditions.
  • Economy: High energy prices along with recent economic turmoil have forced many companies to either close their doors or significantly curtail production.  A great example would be that of Automobile Manufacturers.  This sector is a very large consumer of energy and has experienced a significant downsizing of production recently.  Many experts feel that the current economic problems were partially caused by high energy prices.  Research shows that nearly every US Recession has been preceded by a spike in energy prices.  Decreasing energy demand has contributed to the recent drop in energy prices.

In summary, today’s volatile energy prices have made managing and budgeting energy costs extremely difficult for business owners.  MSI Utilities will provide knowledgeable advice designed to help bring your energy costs under control, allowing you to focus more on your core business.

 

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