What will energy prices do?

After 2008’s run up in energy prices, oil and gas crashed along with Wall Street’s financial collapse.  Economists will debate the cause for years.  Was it the market, or manipulation?  More significantly, what will energy prices do next?

Robert Bryce, Managing Editor of the Energy Tribune, believed that the oil price run up reflected supply and demand.  He’s now changed, writing:

Today, with prices plunging to near $40 instead of the $145 level seen in mid-July, it’s abundantly obvious that speculators were a key driver, probably the main driver, of the surge in oil prices.

Could it have been as simple as speculation?  According to the US Senate Permanent Subcommittee on Investigations’ 2006 report, “The Role of Market Speculation in Rising Oil and Gas Prices,” oil prices above $40 to $50 per barrel were caused by speculation and hedge funds, not supply and demand.  This report was issued before the 2008 price run up.

A growing body of evidence suggests that speculation played a significant role in the skyrocketing price of energy during 2008.  When the speculative bubble burst, energy prices crashed.

Could energy be subject to another speculative price run up?  Much of the speculation is suspected to have occurred in “dark markets,” not overseen by the Commodity Futures Trading Commission.  With the opening of commodities exchanges in India and Dubai, it will be harder than ever to stop worldwide speculation and market manipulation. 

A speculative frenzy could reoccur, but will it?  The answer, unfortunately, is, who knows?

For now, energy prices are likely to stay low until the global economy recovers when they begin rising.  Higher prices do not mean we are running out of oil, but that we’re running out of cheap oil, that’s easy to extract.   

The Green River Formation in parts of Colorado, Wyoming, and Utah, holds 800 billion barrels of recoverable oil by itself.  That’s triple the proven reserves of Saudi Arabia.  Additional oil is available off shore, in the Bakken Formation spanning parts of Montana, North Dakota, and Saskatchewan, in Alberta’s Athabasca Oil Sands, in ANWR, in the Arctic, and on unexplored federal lands in the U.S.

In short, North America has abundant oil, though much of it is unconventional and expensive to extract in an environmentally responsible manner.  So while we will not run out of energy for a long time, we will pay more.

Electricity differs from oil and natural gas.  In the U.S., coal generates 49% of electrical power, followed by natural gas (20%) and nuclear power (19%).  Excluding hydroelectricity, renewable energy accounts for just 2% of electrical power generation, and most of the 2% is biomass.

Coal is abundant and cheap.  Yet, environmental concerns impede the use of coal in favor of renewable energy for the future .  While no one opposes renewable energy, it’s simply not economically competitive with fossil fuel generation or nuclear power.  Reliability issues with solar and wind, for example, necessitate expensive standby capacity.  Utilities will simply pass the increased costs along in the form of higher prices. 

Heating and air conditioning accounts for the majority of home energy use.  Yet, dramatic improvements in heating and cooling technology, as well as improved installation practices can result in dramatic reductions in home utility bills through upgrades of older heating and air conditioning systems.  Since the financial return is based on physics, not the financial markets, it’s the safest investment you can make today.  It can generate an attractive return today and a hedge against higher prices in the future.  Plus, it’s a guaranteed investment.

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