In order to examine the current state of energy supply in the coming year of 2004, we first need to take a look at the issues and trends of 2003 to illustrate where the industry is today. Some would say the year 2003 was one of communication mistakes and misinformation.
Throughout the volatile markets of 2003, we have heard industry analysts discuss the usual storage issues, forecasting the depletion of our natural gas supply and the limited amount of gas that would be available for storage toward the end of the year. Despite these claims, we have seen increased production in the third quarter, record injection levels into storage and an overall increase in the number of available oil wells. This has resulted in pricing levels not seen since early December 2002. Today, we have prices still trending lower, and we have adequate amounts of natural gas in storage for this fall.
During the third quarter of this year, we have stayed on track with our natural resources due to a slight drop in demand, and energy supply has not truly been an issue for 2003 – however, we are not completely out of the woods. The future of energy prices will rely upon a number of factors such as an increase in demand or a general shake-out of the financial markets. Of the many possibilities to be considered, energy prices may rely most heavily upon forecasted and actual weather conditions. As hurricane season comes to a close, the industry will brace for the threat of an early and prolonged winter, which would increase the demand for natural gas and alternate energy resources as the need to stay warm is imposed. Another factor to consider is the boom in the housing industry over the past year. Many new homeowners will be turning on their gas for the first time this year, which may also result in a significant tax on our natural gas supply. This additional demand has yet to be estimated, and with that thought, the weak economy has reduced the industrial demand for energy resources, which may help even the scales should extreme weather conditions or housing become an issue.
Potential hurdles in 2004
The energy industry will be facing a number of issues in 2004, including the threat of infrastructure security, the potential of political instability and the ability of the United States to maintain its current levels of imports and exports. With the current issues surrounding the President’s initiatives with homeland security, the prices of energy commodities will reflect increased costs associated with placement of surveillance cameras and additional staff to operate a safe infrastructure. While this may create immediate job openings, the costs of additional staff, necessary equipment and insurance will be rolled into energy prices.
Politically speaking, the current situation in the Middle East could cause the price of oil to skyrocket, forcing manufacturing units or utilities to make the switch to natural gas. While our consumption of natural gas is mainly produced domestically, the sudden demand for the product due to a lack of oil or unreasonably high short-term prices could cause the price of natural gas to soar.
Next year’s issue with imports and exports can also be considered a wild card. Until recently, Canada produced and exported what seemed to be an endless supply of natural gas for the United States. However, Canada has begun to produce less natural gas and at the same time, their consumption has been increasing, resulting in a net decrease in its exports to the United States thus reducing our supply. With an interruption in our current supply, we will be forced to explore the use of alternative fuels after experiencing an increase in gas prices. Currently, the United States is also a supplemental natural gas supplier to Mexico, however, due to our need to hold on to natural gas reserves, exports to Mexico have been reduced, resulting in decreased profit margins.
Implementing an energy plan in 2004
Industries should consider moving away from strategies based upon financial purchases and moving toward strategies based upon physical purchases. Establishing recall rights is a great way for buyers to establish a consistent, “over-the-counter” exchange contract with suppliers in an effort to ensure the availability of a physical energy product. This way, end users can buy energy products with a ceiling rate, that act as an established cap should energy prices increase.
Government mandated energy suppliers act as competition to small-shop suppliers because they are able to act on a cash-flow basis with the occasional rate increases to make up for profit losses. With this crux of deregulation, such major players are subsidized at some point through the unwelcome rate hikes as seen on homeowners’ monthly bills. This stresses the importance for smaller suppliers to include physical transactions in next year’s strategies in order to avoid having the wrong solution in the right market.
In the business sector, management teams should consider taking a more proactive stance in their energy planning procedures for 2004. In the past, managers have been projecting energy costs based upon trending markets. However, as we see a shift toward more volatile markets, it will be important for management to rely less on adding a three-percent increase to last year’s numbers and calling it the new budget.
To overcome this hurdle, managers need to exercise discipline in sticking with long-term, proven strategies without trying to time the energy markets. For many, building a solid plan requires the help of consultants with trusted credentials and seasoned experience in the energy industry. In the same manner, managers should perform a thorough evaluation of company employees in decision-making roles to ensure a team of strategist thinkers versus a group of employees with a “herd mentality,” to be in complete agreement with the company’s longterm strategy.
Management should finally implement a long-range planning solution to evaluate its true costs, revenue projections and profitability forecasts, and then begin to focus on its energy and price requirements to meet company goals. Most importantly, management should avoid speculating their total expenditures and begin to quantify their maximum allowable energy costs. With a determination to remain loyal to a detailed longrange planning solution, any company should be ready to effectively evaluate price opportunities in the energy commodities for 2004.
Many industrial and commercial end users are unaware that during periods of high price volatility, their local utility companies are in competition for the limited supplies of available energy. The utilities have the advantage in that they are able to bid the ultimate high price in order to secure the limited supplies. Because they are allowed a guaranteed rate of return, utilities simply pass on the high prices to the consumer in the form of rate increases. Public and private businesses do not benefit from this model.
Industries should consider decreasing their reliance on purchase strategies based strictly upon financial and commodity hedging and begin to consider strategies based upon physical purchases. Establishing recall rights is a great way for buyers to continue to take advantage of their current hedging transactions, but at the same time, ensure the availability of a physical energy product during periods of extreme volatility and high prices.
Another strategy managers should consider includes the use of alternative fuels, which are estimated to play a larger role in 2004. Alternative fuels can be cleaned up significantly and employed as a viable option to oil or gas, which can help companies save money in the long run.
In conclusion, there is no doubt that energy prices in 2004 will be volatile as we move into a period of uncertainty. The supply and demand dynamic is currently undergoing significant change; the political instability in the oil producing countries and market uncertainty is contributing to sharp price movements. The inaccurate market information and price forecasting are all contributing factors to the dramatic price and supply changes that we can look forward to during 2004. The best advice for commercial end users is to build a solid plan with the help of trusted consultants with seasoned experience in dealing with these issues.
Throughout the volatile markets of 2003, we have heard industry analysts discuss the usual storage issues, forecasting the depletion of our natural gas supply and the limited amount of gas that would be available for storage toward the end of the year. Despite these claims, we have seen increased production in the third quarter, record injection levels into storage and an overall increase in the number of available oil wells. This has resulted in pricing levels not seen since early December 2002. Today, we have prices still trending lower, and we have adequate amounts of natural gas in storage for this fall.
During the third quarter of this year, we have stayed on track with our natural resources due to a slight drop in demand, and energy supply has not truly been an issue for 2003 – however, we are not completely out of the woods. The future of energy prices will rely upon a number of factors such as an increase in demand or a general shake-out of the financial markets. Of the many possibilities to be considered, energy prices may rely most heavily upon forecasted and actual weather conditions. As hurricane season comes to a close, the industry will brace for the threat of an early and prolonged winter, which would increase the demand for natural gas and alternate energy resources as the need to stay warm is imposed. Another factor to consider is the boom in the housing industry over the past year. Many new homeowners will be turning on their gas for the first time this year, which may also result in a significant tax on our natural gas supply. This additional demand has yet to be estimated, and with that thought, the weak economy has reduced the industrial demand for energy resources, which may help even the scales should extreme weather conditions or housing become an issue.
Potential hurdles in 2004
The energy industry will be facing a number of issues in 2004, including the threat of infrastructure security, the potential of political instability and the ability of the United States to maintain its current levels of imports and exports. With the current issues surrounding the President’s initiatives with homeland security, the prices of energy commodities will reflect increased costs associated with placement of surveillance cameras and additional staff to operate a safe infrastructure. While this may create immediate job openings, the costs of additional staff, necessary equipment and insurance will be rolled into energy prices.
Politically speaking, the current situation in the Middle East could cause the price of oil to skyrocket, forcing manufacturing units or utilities to make the switch to natural gas. While our consumption of natural gas is mainly produced domestically, the sudden demand for the product due to a lack of oil or unreasonably high short-term prices could cause the price of natural gas to soar.
Next year’s issue with imports and exports can also be considered a wild card. Until recently, Canada produced and exported what seemed to be an endless supply of natural gas for the United States. However, Canada has begun to produce less natural gas and at the same time, their consumption has been increasing, resulting in a net decrease in its exports to the United States thus reducing our supply. With an interruption in our current supply, we will be forced to explore the use of alternative fuels after experiencing an increase in gas prices. Currently, the United States is also a supplemental natural gas supplier to Mexico, however, due to our need to hold on to natural gas reserves, exports to Mexico have been reduced, resulting in decreased profit margins.
Implementing an energy plan in 2004
Industries should consider moving away from strategies based upon financial purchases and moving toward strategies based upon physical purchases. Establishing recall rights is a great way for buyers to establish a consistent, “over-the-counter” exchange contract with suppliers in an effort to ensure the availability of a physical energy product. This way, end users can buy energy products with a ceiling rate, that act as an established cap should energy prices increase.
Government mandated energy suppliers act as competition to small-shop suppliers because they are able to act on a cash-flow basis with the occasional rate increases to make up for profit losses. With this crux of deregulation, such major players are subsidized at some point through the unwelcome rate hikes as seen on homeowners’ monthly bills. This stresses the importance for smaller suppliers to include physical transactions in next year’s strategies in order to avoid having the wrong solution in the right market.
In the business sector, management teams should consider taking a more proactive stance in their energy planning procedures for 2004. In the past, managers have been projecting energy costs based upon trending markets. However, as we see a shift toward more volatile markets, it will be important for management to rely less on adding a three-percent increase to last year’s numbers and calling it the new budget.
To overcome this hurdle, managers need to exercise discipline in sticking with long-term, proven strategies without trying to time the energy markets. For many, building a solid plan requires the help of consultants with trusted credentials and seasoned experience in the energy industry. In the same manner, managers should perform a thorough evaluation of company employees in decision-making roles to ensure a team of strategist thinkers versus a group of employees with a “herd mentality,” to be in complete agreement with the company’s longterm strategy.
Management should finally implement a long-range planning solution to evaluate its true costs, revenue projections and profitability forecasts, and then begin to focus on its energy and price requirements to meet company goals. Most importantly, management should avoid speculating their total expenditures and begin to quantify their maximum allowable energy costs. With a determination to remain loyal to a detailed longrange planning solution, any company should be ready to effectively evaluate price opportunities in the energy commodities for 2004.
The information herein has been obtained from sources considered reliable, but is not guaranteed, and it, together with all estimates and forecasts, is subject to change without notice. This report does not purport to be a complete analysis of the security, issuer or industry, and is not an offer or a solicitation of offers to buy or sell any commodities.
Many industrial and commercial end users are unaware that during periods of high price volatility, their local utility companies are in competition for the limited supplies of available energy. The utilities have the advantage in that they are able to bid the ultimate high price in order to secure the limited supplies. Because they are allowed a guaranteed rate of return, utilities simply pass on the high prices to the consumer in the form of rate increases. Public and private businesses do not benefit from this model.
Industries should consider decreasing their reliance on purchase strategies based strictly upon financial and commodity hedging and begin to consider strategies based upon physical purchases. Establishing recall rights is a great way for buyers to continue to take advantage of their current hedging transactions, but at the same time, ensure the availability of a physical energy product during periods of extreme volatility and high prices.
Another strategy managers should consider includes the use of alternative fuels, which are estimated to play a larger role in 2004. Alternative fuels can be cleaned up significantly and employed as a viable option to oil or gas, which can help companies save money in the long run.
In conclusion, there is no doubt that energy prices in 2004 will be volatile as we move into a period of uncertainty. The supply and demand dynamic is currently undergoing significant change; the political instability in the oil producing countries and market uncertainty is contributing to sharp price movements. The inaccurate market information and price forecasting are all contributing factors to the dramatic price and supply changes that we can look forward to during 2004. The best advice for commercial end users is to build a solid plan with the help of trusted consultants with seasoned experience in dealing with these issues.
