For a second week in a row, there were no news stories big enough to spook the energy markets. In last week's newsletter, natural gas and electricity prices were relatively flat. This week, we saw more of the same as natural gas prices only rose 1% and the average price for peak power on the PJM rose less than 1%.
Since it is a slow news week, this is a good time to discuss a couple of supply and demand components that are looming in the background. These components can definitely impact energy prices .
On the supply side, the natural gas production numbers look great. According to the U.S. Energy Information Administration (EIA) reports, producers in the United States are now pumping approximately 82 Bcf per day into the distribution system as compared to approximately 67 Bcf per day in March 2005. Gas production is 22% greater than 2005.
The majority of the new production is coming from the shale gas discoveries. Shale gas now accounts for approximately 34% of our country's total natural gas production and is expected to grow to 50% by 2040. These robust production numbers are a big reason that both natural gas and electricity prices are trading at today's low levels. (Please see the graph section of this issue for the nine year trend line of energy prices.)
However, on the demand side, the background news is more concerning. Natural gas consumption is rising in both the industrial and the power generation sectors.
In the industrial sector, EIA reports that "natural gas use for industrial purposes was more than 3% greater during the first five months of 2013 compared to the same period in 2012." Industrial users are slowly switching to natural gas at their plants because gas prices are low relative to other fuels. In 2012, industrial users accounted for 28% of the gas consumed in our country. If industrial demand continues to grow, we may see some upward pressure on energy prices in the future.
In the power generation sector, 36% of the natural gas produced in 2012 was consumed by the electric generations plants. The demand for natural gas from this sector is expected to grow over the next 30 years. Natural gas is cleaner than coal, power plants that burn natural gas are less expensive to build than the coal-burning plants, and natural gas prices at today's levels are low relative to coal. If demand from the power generation sector continues to grow, we may see more upward pressure on energy prices in the future.
For now, supply seems to be greater than demand. As a result, prices for both natural gas and electricity prices are trading near their second lowest level in nine years. This may be a favorable time to look at an early renewal strategy.
Heads up. Today is the official start of summer. As we all know, a brutally hot summer or an active hurricane season can generate the type of news that causes price spikes in energy markets.