Archive for March, 2009

EIA Energy Conference, April 7-8, Washington, DC

Tuesday, March 31st, 2009

This conference is time well spent if you have an interest in energy policy. Details:
http://www.eia.doe.gov/eia_conference_2009.html

I do not see anything on the conference site that says there will be a live webcast, so I presume there will not be. Videos are available after the event and most if not all of the presentations are available shortly before and/or shortly after the conference, as I recall. Contact EIA for exact details.

Fixed Price Residential Gas Service

Thursday, March 26th, 2009

Natural gas wellhead prices are way down from their peak last summer.   This is documented by the New York Times (“Natural Gas, Suddenly Abundant, Is Cheaper” by Clifford Krauss, March 20, 2009, http://www.nytimes.com/2009/03/21/business/energy-environment/21gas.html?_r=1&th&emc=th), as well as many other sources.  In the United States, spot gas prices are around  $4.30 per dekatherm down from a peak of more than $13 last year.  World spot prices for LNG cargoes have come down by more than two-thirds since last summer according to this NYT article.

Meanwhile, back in the world of natural gas retail semi-competition, my local gas utility (or more accurately, the marketing arm of my utility) has offered me a fixed price of $87/month for either a one or a two year contract.  I’m sure other users have been offered similar contracts  for a different fixed rate than what I was offered.   I am not sure how this number  is developed, although the advertisement told me it was based upon past usage for my household.  I do not know if  competitors have access to the information, but perhaps I should contact my regulatory authority to find out.  I am somewhat concerned that my gas company gives access to my usage data without my specific permission.  I had assumed a “Chinese wall” between the utility and its marketing arm.
The winter heating season is almost over and I suspect part of  my 2009 winter bill includes gas prices that are much higher than today’s spot price, given that there are almost always lags between cost occurrence and cost recovery.  The gas company could sign long term agreements with suppliers, most likely for some amount greater than the spot price, and lock in the supply it needs to serve my needs over the next year or two, depending upon which time period I chose.    I am not going to sign up for this fixed rate, because I think my yearly expenditures will be lower if I am billed monthly as I am now.   But some customers most likely will, because this fixed price “protects” them from price increases .   So the gas company will do well, and some producers who need the cash flow, will do better than they would have otherwise.
There is one thing that is troubling me.   If customers sign up for a fixed monthly bill, what is the incentive for them to lower the thermostat at night, add insulation, keep the water heater at a lower temperature, etc?  I am sure the gas company will send plenty of reminders about how everyone must save energy together with conservation tips, but any energy saving the customers do will flow to the gas company’s bottom line.  If I were paying a fixed price, I’d sleep with the thermostat on 70 F instead of 62 in January.   I simply would not care how much gas I used, because, well… I am insured against higher prices.  Moral hazard and all that theoretical stuff.
If the public has an interest in long term energy conservation, are fixed rate contracts really in the public’s interest?   Energy conservation, meet energy competition, 2009 style.  Al Gore, take notice.  The globe may become warmer.
HEK


New Oil and Natural Gas Drilling Declines

Wednesday, March 18th, 2009

The New York Times reports that the number of oil and gas rigs deployed to drill new oil and gas supplies across the country has fallen to less than 1,200 from 2,400 last summer, and energy executives say the drop is accelerating (“As Oil and Gas Prices Plunge, Drilling Frenzy Ends,” http://www.nytimes.com/2009/03/15/business/15drilling.html?_r=1&th&emc=th).

In the late 1970’s and early 1980’s there were forecasts that both energy consumption and prices were on a permanent upswing. I have an unclassified CIA energy consumption forecast from this era that is representative of such thinking. Natural gas prices were deregulated to encourage increased production. People were urged to conserve energy.  They did.  In a relatively short period of time, thanks to a recession engineered by Paul Volcker, conservation in the face of higher prices and the memory of OPEC’s behavior, prices plunged.  Prices remained low for decades.  People purchased larger automobiles while prices were low and natural gas became the fuel of choice for electricity generation; a physical waste if not necessarily an economic one because other uses capture more of the thermal units available from burning gas.

After the US invasion of Iraq, and in a period of high economic growth, energy prices began to rise again.  More and more foreign oil was imported, but higher prices eventually encouraged more drilling within the US, and especially in areas where natural gas exists, locked in shale, deep into the earth.  The exploration buildup was slow. As explained by those who know the industry, companies are reluctant to commit additional resources to drilling and exploration until they are confidant that an increase in prices is more than temporary.

As one could have predicted from past behavior, when demand and prices collapse, new drilling does also.  And one should expect that if and when energy prices rise again, the buildup in exploration and production will again proceed at a slow pace.  It may be even slower next time because years of low energy prices depleted the supply of skilled workers in the field prior to the recent run-up and collapse of energy prices.

This boom-bust cycle is nothing new in the history of the economics of natural resources and agriculture.  And nothing new in the history of oil drilling either (it was not until the mid-1900s that natural gas became in important fuel). The old “hog cycle” agricultural economics studies are applicable here.

The cycle has devastating effects on regions and states, because they rarely look far enough down the road to put some of the tax revenues aside when high energy prices, increased drilling and higher production are filling their coffers.  Can anything be done about this?  Certainly something can be done. We know how to stabilize commodity prices through various government policies, primarily through the use of taxes, which dampen the swings.  However, anything we do involves trade-offs and American consumers are not very good at accepting this. We want it cheap, we want it all, and we want it now.  Those producing the resources want it untaxed (or tax-preferred) and unregulated. Compromise does not come easy.

We have the means. But thus far we have not had the will.

HEK