Wednesday, June 18, 2008

So, how about those energy prices?

Unless you've spent the last six months in a cave, you've probably heard about the run-up in oil prices. Fewer people, however, have paid attention to natural gas. The chart at right shows the January 2009 natural gas contract, which had reliably traded at around $9/MMbtu until late this winter; for months, I would check the contract each day and considered anything above nine dollars to indicate strong demand.

Those whose job it is to look at the future aren't much help, since they use the past as a guide; unfortunately for them, the energy markets seem to have departed from historical trends. The Department of Energy's "Short Term Energy Outlook" bravely predicts natural gas prices in the $11/MMbtu range through 2009 (somewhat below both current spot and forward levels). The STEO from a year ago (pdf) predicted that 2008 prices would average just over $8.00 (so far, only a few weeks in January got under that price), so clearly no one wants to be the one to introduce a truly scary future scenario.

With higher oil prices, people will drive and fly less, reducing demand and moderating prices. Things may work differently for natural gas, since less natural gas use is discretionary--we don't relax by leaving all the lights on in the house overnight or turning the heat up to 80F. In an earlier post, I discussed natural gas usage in the electricity-generation and fertilizer-manufacturing business. Beyond those and other industrial processes, the vast majority of natural gas is used for space heating and hot water; demand for both may fall, but not immediately and not without substantial adjustment. We have the privilege and the curse of living in interesting times!

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