Energy Professional Brings Meaning to the Madness of Power Pricing

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Wednesday, September 23, 2009

Perception

Perception is really everything you believe, whether it is actually real or not. In my earlier career where supply versus demand fundamentals did not necessarily determine the movement of the price of crude oil, refined products or natural gas, it dawned on me there must be other forces at play. One of those forces is “perception”.

Perception Outweighs Reality

It is the perception of supply and demand that creates the confidence or fear of price movement and the aggressive or passive approach of taking action (buying or selling).

Take natural gas as an example. In 1999, it was perceived there would be such a tremendous growth in demand, and that supply would not be able to meet that demand. I personally was responsible for buying a 5 year strip of natural gas for the company I worked for at that time at a price of $2.25 per MMBtu.

Within one year, that 5 year strip was over $10.00 per MMBtu. We are talking hundreds of millions of dollars of actual price movement due to the perception there would be a shortage of natural gas.

Eventually the priced spiked as high as $15.78 per MMBtu in December of 2005. During that 6 year period of high prices, these increased revenues allowed producers to budget more for exploration. Because of that, supply has been able to meet and exceed demand so now natural gas prices have fallen to $2.409 per MMBtu, near the 10 year low of $1.620 per MMBtu.

With the advances in technology and the increased revenues companies are experiencing, we will probably see an increase in the fledgling natural gas liquids import market. This will probably keep the price of natural gas very low for the next 10 years.

Bringing Meaning To Madness

What does this mean to you? It means that the utility companies should be passing on these tremendous savings to you through lower energy bills.

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