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Energy Rates Are Declining

Oil on the rise; other energy rates on the decline

Despite oil prices being on a steady increase since late December of 2008, alternative energy rates have been a steady decline since the same point. Just last month, natural gas rates reached a 10-year low amidst speculation of a rebounding economy, strong crude prices, and natural gas drillers shutting down operations across the country. Rising energy rates are an item on all consumers’ minds and because of the rising costs of common goods, many businesses have been forced to close their doors.

The United States has fared a bit better than other parts of the world during this global recession, and falling energy rates have factored into the US making it through these tough times. The world economy is certainly not making a quick rebound from the shock of oil prices surpassing $100 a barrel for the first time back in January of 2008. Oil prices peaked in July of 2008 at $147.30 a barrel, and gasoline prices mirrored current prices (more than $4 a gallon across the country). The steep rise in many commodities, particularly oil and food, resulted in the world economy flirting with genuine economic distress with talk of stagflation and a reversal of globalization on the horizon.

Energy Rates and the Economy

The price hikes of 2008 set into motion a downward spiral for United States resulting in real gross domestic product (GDP) contracting at an annualized pace that had not been seen since the 1950’s. The unemployment rate in the United States hit its peak in October of 2009 at 10%, a number that hadn’t been seen since the recession of the early 1980’s. The declining demand for oil and contraction of US GDP kick started a decline in energy rates after oil reached its peak in July of 2008. Oil and natural gas alike reached their all-time peaks in July of 2008, and both have experienced a steady decline in price since their summer 2008 highs.

Energy Rates on the Rise
Energy Rates

Energy rates have decreased in volatility due to the decrease in their demand. Besides the market for oil, demand for other commodities such as gold, natural gas, and coal has been steadily on a decline over the course of the past five years. With the reduction in demand for natural gas, energy rates (such as electricity) have also been on a decline since the market spike of 2008. For instance, the 12 month strip price for natural gas on July 3, 2008 was $13.33 per million BTUs. The Natural gas strip price slid to a 10-year low of around $2.560 per mmBtu just two weeks ago.

As more and more news breaks with statistics favoring the argument that we are climbing out of the recession started in late 2007, conditions become more and more favorable for energy rates to climb from 10-year lows. Unemployment rates continue to steadily decline each month, meaning a higher demand for electricity on a regular basis. Commercial and Industrial loads in the United States make up nearly two-thirds of the aggregate demand curve for electricity, and as demand for electricity by commercial and industrial facilities increases, so will to the price for electricity.

Market Speculation Impact on Energy Rates

While demand plays a large role in stabilizing energy rates, there is a large amount of speculation that plays a role in keeping markets low.
Energy Rates impacted by closings
Energy Rates
Commodities traders were hit with a bit of a shock just last week when the Federal Energy Regulatory Commission announced it would allow the export of liquid natural gas from the United States. With the announcement of US exports of LNG by 2014, speculators immediately voiced their presence on the New York Mercantile Exchange resulting in natural gas prices increasing by approximately 20 percent in just two days of trading. In turn, any reductions in electricity markets resulting from decreased demand numbers (seen prior to the announcement of US natural gas exports) have been neutralized by speculators’ upward pressure.

In addition to the increase in demand for electric and natural gas, the reduction in the number of coal-fired generators will place pressure on energy rates in the near future. The United States Environmental Protection Agency has enacted a series of rulings forcing the closure of a large number of coal-fired generators. Natural gas generators are called upon to fill the gaps left by the mothballed coal generators, and come at a premium to the end user.

Energy rates are on the rise despite the consistent decline since mid-2008. Increased demand, regulation, speculation, oil prices and the rebound of the US economy will all have major impacts on energy rates in the near future.