What’s Really Driving Higher Energy Prices

Guest Column by Rob Myers of Ohio Industrial Energy

Electric rates are going to increase significantly in June for Ohio and gas rates have already increased exponentially. You might find yourself asking how you can mitigate these

increases. The answer is to implement a proactive strategy unique to the ever evolving

marketplace. Below are the top seven factors contributing to higher pricing:

1) EXPORTS – Believe it or not, natural gas is cheaper in the US than overseas. While the US is seeing gas rates at $9.00 per MCF, Europe is seeing rates at $30.00 per MCF. Thus, there is a major demand for Liquefied Natural Gas (LNG) to be exported from the US. This increase in US exports means the less available supply in the US. LNG contracts are typically 20-year terms, so this price-driving factor is not going away anytime soon.

2) INFLATION – Rising pricing in energy is tied to inflation. Energy is the most widely traded

commodity and is among the most susceptible to inflationary pressures. Rising inflation impacts the cost to produce energy.

3) DEMAND — The supply chain impacts of the Coronavirus pandemic continue to be a trigger for volatility. Energy companies are attempting to alleviate the supply issues we are seeing, but there is some difficulty in ramping up production after two years of lower consumption. The timeline for these companies to be fully ramped up will take months—if not years—which means that the energy supply will continue to be tight with demand. The only thing that can have an impact on increased demand is a recession potentially or a significant change in the weather. Until demand destruction is seen, there is no reason for prices to correct.

4) VOLATILITY – Price volatility is here to stay. Energy pricing is not going back to the last few years of stability in pricing. Producers could not make money during the lower demand times of the pandemic. Thus, pricing experienced in the past was not sustainable. On top of this, world peace being broken in a significant way has changed everything. There are too many demand drivers going forward for pricing not to climb. In addition, previous balancing mechanisms to bring pricing back in line have been marginalized (specifically coal). Now that the majority of electricity is generated by natural gas as opposed to coal, the natural gas and electric markets are more closely correlated than ever before.

5) WEATHER – Several cold fronts are anticipated to continue impacting most of North America this winter which will cause increased energy market volatility.

6) STORAGE – Natural gas inventories lag and are currently well below the 5-year average. Now that withdrawal season is here for heating concern grows.

7) PRODUCTION – Producers have been slow to respond to high prices. Production is lagging because of inflationary impacts (cost of equipment) and labor shortage. There is also limited pipeline capacity, so producers are going to have trouble getting their gas out of the ground. The bottom line is that producers are more than happy to take profits instead of spending capital on more production.

The good news for Ohio companies is that Ohio is a deregulated state that favors competition as are about half the U.S. states.  Exploring more options to manage energy price risk and reduce energy costs is going to be vital moving forward.