Today’s energy environment is riddled with a number of significant factors that can affect your bottom line. Sluggish economic activity, record high natural gas production, and the EPA Clean Air Act rulings are all influencing the world of energy, and ultimately you as a consumer.
Environmental Policy Changes:
New and pending governmental regulations will most likely be an additional contributing factor to prices in 2012 and beyond. One such factor is the Cross State Air Pollution Rule (CSAPR), which was released by the Environmental Protection Agency (EPA) on July 7, 2011. This rule requires 27 states to significantly reduce their emissions beginning in January 1, 2012.
These emissions are most commonly released from coal fired power generation. As a result, more than half of coal plants in the states affected will need to take necessary steps to meet these guidelines. These changes will result in higher dispatch costs for coal fired generators and likely shift more generation towards natural gas. In PJM and MISO, more than half of the total generation for power comes from coal. EPA rulings could result in increased price volatility in these regions if retirements are significant enough to shift the overall fuel mix. In October, revisions to the rule were proposed by the EPA in reaction to push back they received from many of the states affected by these standards.
Domestic Resources and Natural Gas:
One of the most rapidly growing areas in the energy industry is the production of domestic resources. Most of the natural gas consumed in the United States comes from domestic production, both onshore from shale resources, and offshore from the Gulf of Mexico. In the past 5 years, shale gas has been recognized as a “game changer” for the U.S. natural gas market. Dry shale gas production in the United States has increased from 1.0 trillion cubic feet in 2006 to 4.8 trillion cubic feet, or 23% of total U.S. dry natural gas production, in 2010. As a result, domestic natural gas production has reached an all-time high in the 39-year period since 1972, when the Department of Energy first began keeping record.
In the fall of 2011, strong production growth and warmer-than-average temperatures contributed to weekly injections consistently outpacing year ago levels. The result has been natural gas storage reaching an all-time high. Natural gas inventories ended November at a record level of 3,851 Bcf, about 1% above year ago levels and 6% above the five year average.
Growth in domestic production coupled with record storage levels have weighed on natural gas prices since the second quarter of 2011. In November, spot natural gas prices fell to a two-year low and marked the fifth consecutive month in which Henry Hub prices have declined. In addition the Energy Information Administration’s (EIA) December Short Term Energy Outlook (STEO) slashed natural gas price forecasts for the fourth quarter of 2011 and winter 2012. The December STEO lowered price forecasts for 2011 by 7 cents from November’s report to $4.02/MMBtu. Expectations for 2012 were also lowered as natural gas prices are forecast to average $3.70/MMBtu, 43 cents below price forecasts in the November STEO.
Source: EIA, EPA