Market cavalry rescues energy
Peter Foster National Post
Projections of a summer and winter of energy horror are beginning to appear greatly exaggerated. This provides an Independence Day present to the U.S. economy without raining excessively on the Calgary Stampede, which begins on Friday.
Once again, the market cavalry -- motivated by a combination of self-interest and technological ingenuity -- has ridden to the rescue.
Prices are down significantly both in the United States -- the 800-pound gorilla of world energy demand -- and across the globe. OPEC, following its Vienna meeting yesterday, announced that it would maintain output levels, but its main concern is on the downside. The imminent renewal of Iraqi supplies, plus a continued broader reduction in demand due to the economic slowdown, could test the lower limit of OPEC's target US$22-US$28 price range, versus a current price of around US$26.
In the United States, gasoline, natural gas and electricity prices have all come down in response to a flagging economy. Naturally, the contribution of lower levels of economic activity to the price moderation is a mixed blessing, but lower prices will, in turn, moderate the degree of any economic downturn. Meanwhile, higher gasoline inventories mean that there will be less pressure on heating-oil supplies this winter. Lower U.S. prices have helped lower prices in Canada, which in areas such as gasoline was already considerably cheaper. Indeed, Canadian gasoline prices have plummeted in the past week, with gasoline selling yesterday in Toronto for 61.9¢ a litre. Spot natural gas prices in the United States, which were US$4.40 per thousand cubic feet a year ago and rose above US$10 per Mcf last winter, have slipped to about US$3.25. Almost everywhere the weather has been cooperative.
As Federal Reserve Chairman Alan Greenspan put it last week: "[I]t is encouraging that in market economies well-publicized forecasts of crises, such as earlier concerns about gasoline price surges this summer, more often than not fail to develop, or at least not with the frequency and intensity proclaimed by headline writers. The reason is that producers and consumers alike react to price signals in ways that help to prevent the predicted disasters."
However, Mr. Greenspan also noted that California could still represent a considerable problem. California's difficulties are those of long-term policy mismanagement and cannot be solved quickly, even with help from the weather. Indeed, it is depressing to note that California politicians continue to writhe to avoid responsibility, and to pursue a witch hunt against alleged energy supply "gougers." They might more fruitfully study the positive impact of free markets on long-run energy supply and demand.
As Mr. Greenspan noted, the energy intensity of the United States -- that is, the amount of energy needed to produce a unit of output -- has been reduced by almost half since the early 1970s. On the supply side, satellite surveillance and computer analysis have doubled the success rate of wildcat petroleum exploration in the past decade. Constantly improving technology is enabling companies to drill deeper offshore. Meanwhile, the amount of oil recovered from reservoirs has increased from one-third to one-half in recent decades. The bottom line, noted Mr. Greenspan, was that "the experience of the past fifty years -- and indeed much longer than that -- suggests the central role that can be played by market forces in conserving scarce energy resources, directing those resources to their highest valued uses, and ultimately ensuring adequate productive capacity for the future." He acknowledged that security and environmental concerns had to be addressed, but that "those concerns should be addressed in a manner that, to the greatest extent possible, does not distort or stifle the meaningful functioning of our markets."
When it comes to California, however, Mr. Greenspan realizes that he is still whistling into the wind. There, he pointed out, "[t]he significant additions to capacity currently being planned or under construction will not be in place in time to eliminate the potential for disruption in the months ahead." And perhaps longer. This week California State Controller Kathleen Connell revealed that the contracts the state has made in recent months -- during the panic that was largely of its politicians' own making -- are likely to lead to high and volatile prices for years to come. Ironically, wholesale electricity prices have recently fallen well below those of the state's long-term contracts.
Using California as an example, Canadian natural gas consumers would be well advised to reject the "peace of mind" offered by gas marketers in the shape of long-term gas contracts at between $7.40 and $8 per Mcf when spot prices have plummeted to less than half that level. Although dangers of disruption remain in a tight energy market, a good rule of thumb might be: Look at what the Governor of California is doing, then do exactly the opposite. |
