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Prospects for Energy Prices Are Mixed
It would be nice if energy prices were simply affected by the fundamental forces of supply and demand, but politics, legislation, and environmental concerns make matters more complicated. That is particularly true in the case of oil. The price of oil starts with demand, which is affected by population growth and economic expansion, factors that are almost always positive. The world welcomed its seven billionth inhabitant in 2011, for instance, and projections are for many more new arrivals. Simply put, population gains mean a greater amount of resources, such oil, natural gas, and coal, will be consumed.
The global economy is still expanding, too, even if not as rapidly as a few years ago, with notable acceleration in the developing nations of China, India, and Brazil. Growth in those regions should more than make up for the shift toward increased efficiency in petroleum consumption in the mature United States and European markets.
The potential for supply disruption also stands in favor of higher prices. Lately, the escalation of tensions with Iran has pushed quotations higher. The possibility of continued problems in other oil-producing countries, such as Libya and Nigeria, may continue to keep oil prices on the boil, too. Moreover, OPEC’s limited spare capacity doesn’t completely dispel fears that an interruption in the flow of oil from a significant oil-producing country would cause prices to spike, and hurt the global economy.
Keeping oil prices in check is the financial crisis in Europe, since the austerity measures being put in place there are reducing demand for petroleum products. Increased production from Iraq, the oil sands of Canada, shale rock in the United States and deepwater drilling initiatives are negatives for pricing, as well. But, as long as demand is on the rise and there is a possibility of a major oil producing nation being taken off line, the bias will likely be to the upside for oil prices.
In contrast to oil, natural gas prices are less affected by outside forces, since the fuel is more regional in nature. Natural gas supplies have become abundant in the United States in recent years because of new drilling technologies able to tap shale rock formations, and that abundance has translated into low prices. But although low natural gas price realizations in the past would have led to material production curtailments, that is happening less this time around, as some of the world’s biggest drilling companies, including the likes of Exxon Mobil (XOM - Free Exxon Mobil Stock Report), Chevron (CVX - Free Chevron Stock Report), and France’s Total (TOT), have gotten in on the boom in shale-related activity to boost their production and reserves. Other companies are faced with time pressure to develop lease acreage or lose their drilling rights. These factors point to a continuation of low natural gas prices in the year ahead.
There are a couple of caveats, of course. There is already a movement opposing the drilling methods used to crack open the rocks to get at shale gas, since they are viewed as having the potential to contaminate water supplies. In addition, the occurrence of earthquakes (thus far relatively minor) near drilling sites where there was little or no prior history of seismic activity has raised concerns. Legislation restricting drilling could be enacted if serious water contamination issues materialize due to an increase in the frequency or intensity of earthquake activity. Natural gas quotations would almost certainly climb under that scenario.
In the meantime, low natural gas prices promise to keep a lid on power prices, which is good for consumers, but could hurt performance at power generators, such as Excelon (EXC), Ameren (AEE), and Constellation Energy (CEG). But low natural gas prices may not influence coal prices all that greatly, since coal is often priced through long-term contracts, railroad shipping costs affect coal prices to a greater extent, and there is an export market for coal.
At the time of this article, the author did not have positions in any of the companies mentioned.