Friday, August 26, 2005

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

4 comments:

Charles said...

With so much evidence pointing to rising energy costs, dependance on foreign supplies (which puts companies at the mercy of government policies foreign and domestic) and the fact that more than 90% of energy costs are from non renewable resources, why don't energy companies do more to reinvest in future thinking projects.

Wouldn't it make sense, even if the government isn't providing incentives in the form of energy bills, to be the ones getting in on the ground floor for solar and wind technologies.

Don't companies tend to go up in value when they expand? Wouldn't this forward thinking, expansion mean greater value short and long term with minimal investments?

Anonymous said...

EAM said: "Thus, propane users may be escaping some of this energy cost increase"

Not where I live in the NE. I just pre-paid a large fraction of my expected propane winter usage @ $1.749 per gallon. That's about where the price wound up at the end of last year and who can afford to gamble if we have a really cold winter.

Ed Morse said...

Thanks for both of your comments. The problem with the government trying to choose which alternative technology will be cost effective is that no one is that prescient. As oil prices rise, competitive forces will develop new technologies that are more cost effective than oil. However, for the time being, oil is still the most cost-effective alternative in most cases. There is nothing magical about renewability if it costs you so much more that it cuts into other consumption alternatives. I'm willing to let the marketplace make these choices, unfettered by government intervention. But I'm also willing to be educated otherwise.

On the propane, I was really surprised by what I found, but that is the news I got from my local farm cooperative in Iowa, where I live. Large variations in costs of propane are apparently occurring. I would expect that propane would also rise if competing fuels were higher, so this was an odd result.

Charles said...

I certainly don't think the government should be endorsing a specific brand or type of alternative energy. But if the government is to issue tax credits as part of its comprehensive plan, it will need to lay down rules for what qualifies. Maybe that list should be more broad and that would help to resolve the issue.

Currently the cost of hybrids and alternate resources is greater than the cost bennefit of purchasing the equiptment. That means tax credits are neccessary to encourage consumers.

Personally, I think we should tie the credits to the actual usage. Vehicles getting better mileage would have a lower tax and liscensing fees via road taxes. Those that get poor mileage would be taxed higher for their usage. A formula could be derived from MPG and miles driven annually to deterime the tax any auto owner will pay for their vehicle. Since these two factors are dependent on use and are directly related to road upkeep and other related costs.