Washington Post: Is Another Energy Crisis Ahead?

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Washington Post: Is Another Energy Crisis Ahead?

By Kenneth Bredemeier

Washington Post Staff Writer

Sunday , September 17, 2000 ; H01

This winter the mailman will be delivering markedly higher heating bills throughout much of the country, including the Washington area.

Those who use natural gas--the dominant heating fuel in the Washington area and throughout the United States--face a 27 percent increase. Heating oil customers, particularly in the Northeast where 35 percent of homeowners use the fuel to warm their houses, may have to pay more than $2 a gallon--twice the current price--as the days grow shorter and temperatures plunge.

Motorists get hit in the wallet every time they pull into a service station: They now typically pay more than $1.60 a gallon for gas, and the days of 90-cent-a-gallon gas--yes, it was just last year--are but a distant memory. At least that's better than in England, France and Belgium where motorists are waiting in long lines to buy $4-a-gallon gas, only to find that some stations have run out.

Is this the start of an energy crisis?

Many energy analysts and government economists say not, that supplies of various forms of energy will prove sufficient over the next few months, but that the costs will continue to follow the law of supply and demand. When there's not an excess of a fuel available--and numerous types of fuel reserves are quite low--consumers will likely think the product costs too much, at least compared with the prices they've been accustomed to paying.

But as winter approaches, several loosely connected events that spanned the globe over the past couple of years have heightened awareness of energy in our lives and reminded us of a lesson learned in the 1970s: Energy prices can be volatile, unpredictable and can reverberate throughout the economy.

As Philip Verleger Jr., a partner with the Brattle Group, a Cambridge, Mass., economic consulting firm, concluded, "Consumers will have to spend more on energy. They will have less to spend on other things."

On top of the triple-whammy of higher natural gas, heating oil and gasoline prices, consumers are also vulnerable to the vagaries of the electricity market because the industry has been in the midst of deregulation.

While California and other states have struggled with power prices during the adjustment to the new competitive environment, electric utilities locally have maintained stability. Potomac Electric Power Co. says its 621,000 residential customers in the District and suburban Maryland--about 15 percent to 20 percent of whom heat their homes with electricity--will find their bills about 5.5 percent lower this winter, assuming they use the same amount of electricity as last year. Across the Potomac River, Dominion Virginia Power's customers in Northern Virginia are likely to see their bills stay about the same.

Much of the current energy pricing is out of consumers' hands, analysts say, because the United States has chosen, to a large degree, to remain dependent on oil pumped out of distant lands controlled by OPEC nations.

The 11-member Organization of Petroleum Exporting Countries agreed last weekend to increase its oil production by 800,000 barrels a day in hopes of pushing the price down to $28 or so. Even so, oil prices hit a new 10-year high on Friday, closing at $35.92 a barrel amid worries about tensions between Iraq and Kuwait. These are prices not seen since the days of the military buildup before the Persian Gulf War in November 1990.

Analysts say that 21 months ago, when oil was below $10 a barrel and natural gas was at $2 per 1,000 cubic feet, drilling companies, many of which produce both fuels, began to curtail their exploration as a result of dwindling revenue.

The OPEC nations cut their production at the time to force prices upward--and now they have more than tripled. Private exploration for more natural gas in the United States, chiefly in the Gulf of Mexico and several southern and southwestern states, only grew after drillers concluded that the demand was significant enough and they had sufficient capital to look for more.

Peggy Laramie, spokeswoman for the American Gas Association, the natural-gas utilities' trade group, said the low price of gas at the time contributed to a feeling by producers that there was plenty of supply, so they cut back on drilling for about nine months, from August 1998 to April 1999. Fewer than 400 rigs were drilling at the time, although now that figure has topped 800.

With little new natural gas exploration, the flow through the supply chain slowed, of course, even as demand increased in the United States, Europe and Asia.

The result was predictable: Higher natural-gas prices at the wellhead and, over time, bigger bills for consumers. The $2 wellhead price has now risen to $5. Laramie said the last time wellhead prices were this high was in 1985. As Verleger said, "Demand was growing. We didn't pick up the supply and--whoops, there's a problem."

In the Washington area, where perhaps 70 percent of all homeowners heat with natural gas, Washington Gas Light Co. estimates that its residential customers will see the typical monthly bill jump $26, to $112.50, in the November-to-April period, a 27 percent increase over last winter.

Laramie said the gas utilities' trade group believes that with the renewed exploration, natural gas prices "will be moderating by spring, but we don't want to over-promise."

The price of oil and its derivative products is expected to remain volatile, depending on a host of factors, including demand by consuming nations, the severity of the upcoming winter months after a string of three relatively mild winters, and how much more oil OPEC nations might decide to produce if prices stay high.

This mix of factors leaves the analysts, OPEC and government economists using a lot of "ifs" and "buts" and "possibilities," but mentioning few certainties.

OPEC President Ali Rodriguez predicted this past week that oil prices could reach $40 a barrel this winter, even if only for a relatively short time.

"Crude oil prices are very high and will remain very high throughout the rest of the year," said John Lichtblau, chairman of the Petroleum Industry Research Foundation, which is funded by oil companies. In terms of gasoline, a shortage is unlikely, "but prices will be high," he said. "It can go back to $1.40 a gallon because of more production and lower crude prices. It won't start right now, maybe later this year or early next year."

But with heating oil, he said, an unusually cold winter in the Northeast could bring about problems, given low inventories. "I don't see a shortage, but prices will be very high."

Verleger was less certain.

"We do have a problem," he said. "I think we're going to see high prices this winter for heating oil and natural gas. But I'm not certain about it. I'm not willing to go out and say it's going to be awful."

With oil prices at record levels, President Clinton last week came under increasing pressure to tap the nation's Strategic Petroleum Reserve, nearly 570 million barrels of crude oil stashed at four sites in Louisiana and Texas. The reserve is intended for use in cases where the president determines there is a national supply emergency. High prices alone do not qualify. The White House says all options to combat the current low reserves of various fuels and high prices are under consideration. In the past, however, the oil reserve has been tapped to combat mechanical breakdowns in the oil industry's pipeline system or to trade lower-quality oil for a better grade.

"If the Strategic Petroleum Reserve is released, that would knock $15 a barrel off the price," Verleger said. "One piece of news like that and this [crude oil price] will drop like a rock."

At least for the winter months, electric utilities generally have found a way around the high price of oil and natural gas that some of them must use during peak-demand periods in the summer to generate electricity. They're able to focus their winter generation on cheaper fuels--coal, nuclear and hydroelectric power.

"That's cheaper fuel and fuel that's less subject to the volatility of the world oil and world natural-gas markets," said Chuck Linderman, director of energy generation and supply policy for the Edison trade group. "Generally we're in good shape on supply."

http://washingtonpost.com/cgi-bin/gx.cgi/AppLogic+FTContentServer?pagename=wpni/print&articleid=A21134-2000Sep16



-- Carl Jenkins (Somewherepress@aol.com), September 17, 2000

Answers

Boy, one thing I can't agree on at all is that if Clinton approves releases from the petroleum reserve, the price of crude oil will fall like a rock--$15, I think the writer said.

It's well known that this would be a temporary palliative. I guess it's temporary expediencies that are all that's important in an election year.

-- Wayward (wayward@webtv.net), September 17, 2000.


You've got to give the Washington Post credit for even running with a story like this at election time. But, as usual the significance is downplayed.

-- Uncle Fred (dogboy45@bigfoot.com), September 17, 2000.

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