Oil prices dominated energy news in 2007, and consumers have seen the effects at their local gasoline stations. Quoted world oil prices are commodity prices. These prices are similar to stock prices; they are volatile and respond to both fundamental supply-and-demand issues and to emotional concerns about world events that might be related to energy.
World oil prices were $30 per barrel just a few years ago, but have recently approached $100. Much of the pressure for higher prices comes from growing world demand, especially in China and India, combined with less expansion of production and refining capacity. But war in the Middle East and concerns about terrorism add an emotional concern for the future that pushes prices even farther upward. Another important factor contributing to high oil prices is the declining value of the U.S. dollar.
Oil is a worldwide commodity and its price responds to events on a world scale. Changes in the oil commodity markets find their way into consumer gasoline, diesel fuel, and heating oil prices rather quickly. Most analysts of oil markets don't expect that $100 oil is sustainable for the long term, but until these prices subside we can expect higher prices to remain for consumer oil products. How long oil prices will remain high is very uncertain.
Responses to the higher prices in the form of reduced demand, slowing economic growth, or increased supplies will lead to lower prices. However, it is a fact that our economy is not as sensitive to high oil prices as it was in the past because we have reduced its use relative to economic activity levels over the past 25 years and, as a result, the economy has grown more resilient to higher oil prices.
This is good news in that we are less likely to see an economic recession as a result of high oil prices, but it is bad news because high oil prices could persist for a longer time without reduced demand.
Further increases
During 2008, I think that we could see further increases in consumer prices of oil products in the early part of the year, followed by some moderation later in the year. But bear in mind that these prices defy forecasting with any confidence. A slowdown in world economic growth could lead to falling oil prices. But acceleration or spreading of hostilities in the Middle East would lead to higher prices. Economists might see some reason for the slowdown in economic growth given high energy prices and the situation in financial markets. But, at the same time, peace does not appear imminent in the Middle East.
Natural gas
The commodity price of natural gas, unlike oil, has remained fairly stable between 2006 and 2007. This is not to say natural gas prices have not been volatile; they have. However, were it not for the extremely high oil prices, natural gas commodity prices likely would be lower. Moderate temperatures during 2007 and a lack of damaging hurricanes in the Gulf of Mexico have resulted in record levels of natural gas storage as we enter the 2007-2008 heating season. Normally this would put downward pressure on natural gas prices, but they have remained strong. Another warm winter could lead to significant reductions in natural gas prices early in 2008. However, concerns about cold weather and high oil prices could moderate reductions in natural gas prices.
Whereas oil prices are subject to world market conditions, natural gas prices tend to be primarily a North American phenomenon. Although the growth of liquefied natural gas markets is expanding the influence of world supplies on natural gas prices, it is still largely a North American market. The dominant concern driving natural gas prices higher since 2000 has been the difficulty and expense of expanding natural gas supplies. This is magnified by expectations that natural gas use for electricity generation will grow in the future as other fuel choices are constrained by carbon control policies.
Although early 2008 may see some weakening of natural gas prices, most analysts expect natural gas prices to remain high compared to levels of a few years ago.
Consumers do not experience natural gas price volatility to the same degree they do oil prices. That is because residential and most commercial natural gas consumers are served by regulated local distribution companies, such as Northwest Natural Gas Co. These companies are able to smooth out the effects of volatility in natural gas prices on a month-to-month basis. However, in the longer term, changing natural gas prices do lead to changes in consumer prices.
The recent weakness in natural gas prices led to a price decrease for Northwest Natural starting last November. I expect prices in 2008 to remain lower than 2007 at least for the first half of the year. Beyond that, who can forecast temperatures and hurricanes for next summer?
Electricity
The outlook for electricity prices for the Vancouver-Clark County area is better than for oil products. Whereas oil is a world commodity, and natural gas is a North American commodity, electricity is essentially a Western North American commodity. Electricity prices in the commodity market are influenced by natural gas prices and basic supply-and-demand conditions. Currently, there appear to be adequate electricity supplies in the West, and if natural gas prices are stable or decline in 2008, there should be little upward pressure on electricity prices.
Although electricity commodity prices are influenced by natural gas prices and can be volatile, consumers are even more protected from this volatility than they are in natural gas markets. Consumers of electricity in Vancouver, for example, are served by Clark Public Utilities, which buys about half of its power from the Bonneville Power Administration at cost-based rates.
Bonneville's electricity supplies come mostly from hydropower and one nuclear plant. The cost of this power is not affected by natural gas prices. The rest of Clark's electricity comes from the River Road natural gas-fired power plant, the cost of which will be affected by natural gas prices.
Across the Columbia River, investor-owned utilities Portland General Electric and PacifiCorp serve consumers' electrical needs.
These have some of their own hydroelectric supplies, but do not have access to Bonneville's power supplies. A court decision in 2007 cut off a sharing of benefits from the federal hydropower system with investor-owned utilities and resulted in a substantial price increase for electricity from these two utilities.
A new resolution for sharing these benefits is likely to mitigate that price increase partially, but prices likely will remain somewhat higher in Portland for 2008. At the same time, public utilities, such as Clark Public Utilities, could see reduced cost for their power from Bonneville.
Email This
Larger Font
Print This
Smaller Font
