June 28, 2018
Energy prices respond to supply and demand like any other product or service, and there are a myriad of things that control pricing of energy. It is important to note that energy is affected globally by supply and demand. The most dramatic change in the energy landscape certainly has to be the energy independence the United States in the last decade. Prior to this time, the United States was a large importer of energy and depended heavily upon foreign sources of oil and even natural gas. Unfortunately, many foreign sources of oil in the world are not always friendly to the United States and political tensions in these areas have had profound impacts on energy prices. Beginning around 15 or 20 years ago, United States embarked on a mission to gain energy independence mostly as a result of technological innovations in the oil and gas industry. These innovations have allowed oil and gas companies to extract crude oil and natural gas from areas of the country that were previously thought to be inaccessible. Hydraulic fracking and horizontal drilling are the primary technologies had that have driven this. So in the last decade, due to these technological innovations, the United States in many sectors is now not only not dependent upon foreign sources of energy, but is actually becoming an exporter of these products.
Getting back to our original comments about supply and demand, just because we are becoming energy independent and have driven down the cost of extraction, doesn’t mean were out of the woods yet. United States is also undergoing significant economic growth at the moment, and whenever that happens demand increases and supply decreases which is driven the recent increases in crude oil above $70 per barrel. Political tensions with Iran have also added to these price increases. Volatility is also another issue to deal with, which generally refers to short-term rapid fluctuations in price, versus long-term trends in price. Volatility spikes are usually caused by the reduction in excess capacity by certain energy providers around the world. Traditionally most of the excess capacity for petroleum in the world was located in the Middle East, most specifically with Saudi Arabia. Saudi Arabia still has excess capacity, however as this capacity diminishes volatility may increase. We also have to look at consumption, and while we do see increases in consumption due to the economic uptick of our economy, they are not as dramatic due to the fact that many technologies have been introduced to increase energy efficiency and we also still have increasing levels of renewable fuels entering the energy arena. Natural gas and propane energy prices tend to be slightly more volatile due to the fact that they are predominantly domestic markets with relatively non-mature export markets. This however has been changing over the last several years as the United States begins to export more natural gas and propane. We try to refrain from forecasting, however based on what we see we believe the supply picture, especially domestic supply is abundant and stable. In this regard, we expect to see less volatility than we have experienced in the past. We have also not seen energy producers coalesce around OPEC as they have had in the past, and when supply limitations cannot be observed, price increases generally don’t last that long.