Natural Gas – Electricity
The energy industry has experienced considerable volatility over the last several decades. Crude oil prices 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 unpredictability.
There are a number of conditions responsible for creating this instability in the energy markets over the years. Below are a few:
- Energy Trading: Energy markets have become extremely volatile due to a vast influx of investment capital. Twenty 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 changed to 29% commercial and 71% non-commercial. This imbalance of consumers to speculators created an opportunity for extreme fluctuation.
- Weather: In years past, a large portion of the US natural gas and crude oil supply was produced in the Gulf of Mexico. In recent years, shale production, or fracking, has skyrocketed, making Gulf disruptions far less relevant. Hurricanes Katrina and Rita devastated the Gulf in 2005. It took producers months to repair/rebuild these production facilities. The production drop-off caused panic prior to winter, and consumers saw their natural gas costs nearly double. Severe cold weather snaps increase heating demand, which therefore causes a strain on supply levels.
- Supply and Demand: In recent years, the supply and demand balance of crude oil and natural gas in the United States has been considered “tight/strong” growth in the economy, booming new home construction, industry expansion and natural gas burning vehicles fueled growth of demand. 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, creating a higher demand from natural gas to produce electricity. Visit www.eia.doe.gov for recent supply and demand reports as well as a wealth of additional information.
- Economy: High energy prices, along with economic turmoil, historically force many companies to either close their doors or significantly reduce production. For example, automobile manufacturers are a very large consumer of energy and can experience a significant downsizing of production during economic downturns. Research shows that nearly every US recession has been preceded by a spike in energy prices. Conversely, a decrease in energy demand has contributed to the recent drop in energy prices.
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 keep your energy costs under control, allowing you to focus on your core business.