What the H*** is Going On with Energy Prices?

I have been doing the rubber chicken circuit recently - visiting Rotary clubs throughout Connecticut to talk about skyrocketing energy prices.

Connecticut, one of 14 states and 2 provinces where MXenergy does business, gets a double whammy. First, it’s a state where natural gas fired electric generation has seen utility prices increase by over 50% in the past year (24% since March alone.) Second, gasoline taxes are reputed to be the highest in the country, so when you hear on TV that the price per gallon is around $3.60, pity the poor souls in Connecticut where the average price is nearing $4.40.

A brief apology and to be fair, it’s not all chicken and it’s certainly not all rubber. I’ve had some great meals and I’ve eaten almost as many scrambled eggs as chicken at the breakfast clubs for insomniacs like myself.

When I speak to a Rotary club I begin with the question “Why are energy prices so high?” The answers are sophisticated. People really do have a sense of what’s going on. Here’s a recap of what I hear:
* High energy demand from the developing world (read: China and India)
* Declining production of oil and/or gas fields in Russia, Saudi Arabia, Venezuela, not to mention the US and Europe
* Increasing electricity demand from all the gizmos we love (air conditioners; microwaves; computers and printers; answering machines; cell phone chargers; etc.)
* Speculative trading interest
* Greed

All of these play some role in the higher prices, although I do not believe the last two are major concerns. Prices have gone up recently despite speculators, not because of them. The “smart money” has been betting that prices will go down, which pushes prices down temporarily. Unfortunately, when many of these speculators lost money, they needed to stop their losses and their buying may have had a short term bullish impact on prices. As for greed, ask yourself whether a company like Exxon, owned by shareholders like you and me, should set the price of its commodity below prevailing market levels? If you are pricing a chair for sale at a tag sale, do you price it at where people will buy it or do you give it away?

Sometimes I need to distinguish between different forms of energy: crude oil, natural gas and electricity. Crude oil is the source of refined products like gasoline, diesel and heating oil that fuel transportation, home heating, and much industrial production. Natural gas is used for heating and more and more for electricity generation. Electricity is a manufactured product from several fuels, most notably coal, natural gas, nuclear, wind, solar and to a limited extent fuel oil.

All of these forms of energy are plagued by a delicate balance between supply and demand. If the world were awash in energy, like it is of air, it would be cheap. But shortages create upward price pressure and not only for the original form of energy like crude oil and natural gas but also for the byproducts like gasoline and electricity.

What can we do about it? Here, too, the answers are astute. Lower consumption is the most popular, but here I must caution my listeners. How many of them are prepared to toss their microwaves and computers into the landfill or dispense with their need for air conditioning and instant cell phone communication. True, we can all cut back by utilizing demand side management like setting the thermostat, more efficient hot water heaters, cars with better mileage, shorter showers, etc. But for all our efforts at efficiency, our cumulative lust for energy grows unabated.

Opening up new sources of supply is another potential approach. But aside from northern Alaska or the newly discovered fields off of Brazil, there have been no new and unexploited oil fields found for many years. And don’t hold your breath for the first rigs to pop up off of Miami Beach or Malibu. Nuclear? Youbetchya, until you consider that the first plants in 30 years have been licensed only recently and they may take 20 years to build.

Alternative energy? The best idea, perhaps, but also the longest lead time. It will be years before solar is cost-effective or wind is reliable. Recently, wind generation in Texas, the largest wind producer in the country today, was held responsible for peaks in electricity prices to $2,300 per megawatt hour, up from a normal $80 or so, because when the wind dies the grid needs to replenish supply quickly from costly peakers.

Is there anything else?

Yes, but the answer may not be what people want to hear. It may be that we have an energy crisis because prices are too cheap, not because it is too expensive. In Europe, prices are substantially higher than here in America. Costs for energy sources like gasoline and electricity are 50-100% higher than we pay. As a result, Europeans drive smaller cars and keep their electricity usage down. Their overall bills may be the same as ours, but their consumption is less.

I am not advocating higher prices. At MXenergy, we lock in prevailing market prices and offer the benefits of price protection to our customers. But I am advocating leadership. We need leadership from Washington and a serious assessment of long term energy policy, not to win votes in the next election but to address the need in our country for safe, reliable energy supply at reasonable cost.