ACEEE'S GRAPEVINE ONLINE

September 20, 2005

KATRINA, THE PERFECT(LY AWFUL) STORM FOR U.S. ENERGY MARKETS

Hurricane Katrina is first and foremost a tragedy in human terms. Several ACEEE staff have friends or relatives who are directly affected by the storm's damage, reminding us that we are all connected, even though hundreds of miles separate us from the devastation.

Beyond the human tragedy, Katrina's aftershocks could become the worst American energy crisis since the 1970s. This storm could not have come at a worse time for American consumers and energy suppliers. While much of the current focus is on gasoline, all of our energy markets were tight before the hurricane hit as increasing consumer demand has outstripped the suppliers' delivery capacity. This situation has left the U.S. in an energy straightjacket, with none of the ready supply options we've had in the past. Rising natural gas prices since 2000 have driven power suppliers to increasingly choose coal, which is driving up coal prices. But limits in coal production capacity, coupled with rail car shortages and western track problems have recently forced power suppliers to turn back to gas. A very hot August exacerbated this situation as suppliers bought still more gas to meet surging power demands. As a result, natural gas prices have soared while replenishment of storage for the coming winter heating season has faltered, promising soaring gas prices this winter. At the same time, high global demand for gasoline, jet fuel, heating oil, and diesel fuel has outstripped oil refiners' capacity, leaving worldwide oil product reserves at perilously low levels. And the hurricane season is not yet over.

With Katrina disrupting oil and gas production, refining, and transportation in the Gulf region, concerns are growing about the supply and price of heating fuels for this winter. These extreme conditions mean that all energy prices will almost certainly climb to new highs in coming months. EIA now projects that higher fuel prices will increase average retail electricity prices by 11% next year. These higher prices for all energy are projected to further increase household energy expenditures by upwards of 70% relative to 2002, thereby decreasing the average household's disposable income by over $2100 and damping consumer spending, crimping economic growth, and fueling inflation. High energy prices will also drain private and public coffers, especially those of public agencies operating low-income energy assistance programs. As high energy prices drive more families to seek energy assistance, the greater size of energy bills means that available funds won't go as far. If we have a very cold winter (the last three have been much warmer than normal) this problem could become particularly dire.

In response to this crisis, Congress is showing renewed interest in energy, despite having recently passed the Energy Policy Act of 2005 (see next story). ACEEE's Industrial Program Director, Dr. Neal Elliott, testified September 14 before the House Government Reform Subcommittee on Energy and Resources about the role of energy efficiency in addressing high energy prices.

It will take all of us doing lots of little things to make the difference. If we use energy conservation and efficiency smartly in this crisis, we can keep Katrina's damage from spreading further beyond the Gulf coast region as its people struggle to rebuild their lives.

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