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January 17, 2006

AMERICA'S ENERGY STRAIGHTJACKET

While the New Year has seen oil and natural gas prices fall from their dizzying post-hurricane highs, consumers shouldn't quit worrying about their energy problems. Gasoline pump prices have come down by about $1 per gallon from their $3 peaks, but crude oil prices remain high, up $30 per barrel from just two years ago. What's worse, we have the same tight refining margins that spiked gasoline prices in 2004 and 2005, and with consumer demand recovering, we are poised for new price spikes as the summer driving season arrives.

In a major shift of the federal government viewpoint, the Energy Information Administration in their 2006 Annual Energy Outlook, notably conservative in low-balling future energy prices, has raised its long-term oil price by $21 in 2025 to $50 per barrel.

We also find wholesale natural gas prices down to $9-10 per million cubic feet from their highs above $15 last fall, as Gulf production recovers from hurricane disruptions and a mild early winter has reduced demand. But $9-10/MCF is still 70% higher than the 2005 numbers, and three to four times the prevailing price during the 1990s. Lest we become complacent, futures for next winter are currently trading well above $11.

Electricity prices are also rising significantly in many states as deregulation-mandated price caps expire and prices rise for coal and natural gas, the major utility fuels. If we experience a hot summer like that of 2005, peaking electric demand will again strain fuel markets, driving prices still higher in an all-too-familiar pattern.

ACEEE sees three wild cards for the coming year:

Geo-Political Disruptions – We received a wakeup call New Year's Day when Russia cut off natural gas deliveries to Ukraine, sending shockwaves through world energy markets. With global demand outstripping markets' ability to continually increase energy supplies, the world remains vulnerable to manipulation by state-owned energy suppliers.
Surging Global Demand – World oil markets have tightened as demand has exploded in emerging markets such as China and India. Continued growth in these markets could lead to even tighter markets than we have seen so far.
Weather – Weather has been both a friend and an enemy to stable energy markets. Mild weather for the past few years has reduced demand for electricity and natural gas, masking underlying tightness in these markets. However, two unusually active hurricane seasons have resulted in serious disruptions in oil and gas production and refining, leading to tight markets and record price spikes. Weather is likely to remain a major driver throughout the coming year.

As we gaze into the murky crystal ball of 2006 energy markets, energy efficiency and conservation remain the best options to stabilize energy markets by reducing demand. See ACEEE's recent reports on petroleum and natural gas savings for our policy recommendations.

For more details, see a recent presentation on tight energy markets by Dr. Neal Elliott, ACEEE's Industry Program Director.

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