Notes on Energy Costs

Energy Costs: Looming Impacts

Much attention has been paid to the rising cost of gasoline, which has reached a nationwide average of 2.61 per gallon (as of 8/22/05), up nearly 73 cents from one year ago. Consumers of gasoline can change various behaviors to deal with these costs. Some are able to drive less, either by combining trips, taking public transit, or just staying home. Others choose to drive the same amount, but they cut back on other purchases, which they deem less important or satisfying. Still others make investments in higher mpg vehicles, hoping to recoup that investment through fuel cost savings.

Switching to other fuels, like Diesel, may increase mpg, but Diesel costs have also increased. Nationwide, diesel fuel averages $2.59/gallon, also up about 71 cents from a year ago. Jet fuel, basis New York Harbor, as of last Friday (8/19) was at 1.91, up about 66 cents from August 2004. These costs no doubt affect travel and transportation industries, as well as the prices that many of us will pay for shipping ourselves or the good we consume.

It is important to recognize that still another form of energy cost is also looming on the horizon: the cost of staying warm this winter. Home heating oil basis New York Harbor is at $1.80, up nearly 50 cents from this past January, representing a climb of nearly 40%.

Propane, which is used a lot in the deep Midwest from which I write, averaged in the $1.50 range last winter according to government reports. However, I just checked with my local coop, and the contract price right now is $1.19, which is about the same as it was last winter. Thus, propane users may be escaping some of this energy cost increase. Much of this demand is seasonal, though I noted on a recent trip through Nebraska that many irrigation units now run on propane, no doubt due to the lower per gallon costs of operation as compared to gasoline.

Natural gas, which is used for home heating as well as electricity production, has also increased significantly over the past year. Thus, those of use who use electricity to heat our homes should not be too smug. An article in the September 5, 2005 edition of Forbes (Hey- how do they do that! It's only August 26! Too bad they don't post the September 5 stock prices in that issue) suggests that electricity costs are rising due in part to substitution of natural gas for coal at some plants. (see page 56) It turns out there is a transportation problem in getting the clean coal that our power plants like to burn out of the Powder River Basis in Wyoming. (Those trains pass through our part of the country every day – and the size of the hole dug to fill them each day must be staggering.) Apparently, we may have a problem until rail companies invest to make better tracks. (I have also heard about some rail transportation problems affecting grains, which I hope to discuss in a later post).

The rise in home heating costs is likely to dig heavily into consumer spending through substitution effects. Energy conservation efforts, like home insulation, will also probably result. Much like the tendency to find more fuel-efficient vehicles, we will want to make our homes more fuel efficient. This could bode well for companies that provide goods and services in this area, including insulation, furnace, and window manufacturers. As for what consumers will cut when they spend on higher heating costs, I’m looking at entertainment and travel as likely categories for discretionary spending. I would also guess that holiday retail spending may be lower if these energy trends continue.

EAM



Data on energy prices can be found here:

http://tonto.eia.doe.gov/oog/info/

A story in the August 26 New York Times by Jay Malowaud discussing energy cost concerns is also worth reading. It can be found here:

http://www.nytimes.com/2005/08/26/business/26energy.html?ei=5094&en=0eb5fefbd296c955&hp=&ex=1125028800&partner=homepage&pagewanted=print