Fears of an Energy Crisis Begin to Dim

Consumption Cuts Help Lower Prices for Gasoline, Natural Gas and Electricity

By Peter Behr Washington Post Staff Writer Friday, June 8, 2001; Page E01

What happened to the energy crisis?

The Energy Department predicted yesterday that gasoline prices will drop nearly a dime a gallon at the pump, from the current average of $1.71 a gallon -- far below the excited warnings several months ago that a $3-per-gallon price was possible.

Natural gas prices, which soared last winter to more than $10 for 1,000 cubic feet, doubling heating bills for many consumers in northern states, fell to $3.56 in early June. That's nearly a 25 percent decline from the beginning of May, according to a spot market survey by Platts, a division of McGraw-Hill Cos.

Even California's siege of record electricity prices has lifted significantly, although they remain very high. Hourly spot market prices have dropped to around $75 for one megawatt of power in California, the first time statewide prices have been below $100 since the state's energy crisis began late last summer, Platts reported. In April the California Department of Water Resources, which had to take over power purchases from the state's insolvent utilities, paid an average of $284 per megawatt hour. Now it is able to buy power for this summer at half that amount, the department said, even though the threat of blackouts remains.

"We've entered a period where it doesn't look as desperate as a month ago," said Peter Beutel, president of Cameron Hanover Inc., a New Canaan, Conn., energy risk-management firm.

Analysts and economists surveying the price swings said it was a new variation on an old theme: The sharp spikes in energy prices over the winter have prodded consumers and companies to reduce fuel consumption.

"This shows what happens when you keep your hands off and let the markets work," said Gary Ross, chief executive of PIRA Energy Group, a New York consulting group.

Meanwhile, high profits have caused a burst of exploratory drilling for oil and gas and have cranked refining operations up as high as they can go. Mild spring weather has helped, too.

But analysts warned that the nation's energy infrastructure -- the pipelines, transmission connections and refineries -- is still stretched disturbingly thin. A range of possible events, from harsh summer weather to an extended loss of crude oil production from Iraq, could send energy prices back up again.

For now, however, the drop in energy prices was another demonstration of consumer power, analysts said.

California, battered by unprecedented power costs and warnings of summer blackouts, cut its electricity use by 8 percent in May from the same month a year earlier, Beutel said.

"Conservation has had a big effect," he said. Normally, it takes a jolt of higher prices to trigger cutbacks in fuel consumption. California's consumers so far have been shielded from much of the surge in power prices since last fall. But the threat was obvious and consumers reacted to it, he said.

Gasoline prices have dropped primarily because of a leap in production and imports caused by higher pump prices and higher profits this spring, said Adam Sieminski, an energy analyst with Deutsche Banc Alex. Brown in Baltimore. At the same time, motorists trimmed gasoline purchases by about 1 percent in May, compared with a year ago.

"All of this $3-a-gallon gasoline talk was a bunch of horsefeathers," Sieminski said. Instead, gasoline production has climbed steadily and inventories have returned to normal seasonal levels for the first time since last summer.

Sieminski and other analysts said the worst fears for this summer have been calmed by improved energy supplies, although nasty surprises could cause prices to head up again.

"Nobody is predicting the nightmare scenarios [for California] that people were seeing last winter," said Platts senior market reporter Mike Wilczek. "But everybody realizes there's still a lot of risk. This market can still scream because there's still a shortage of [power] supply."

"Summer hasn't begun," Beutel cautioned. "The consumer will determine where gasoline prices go in July and August." A fuel-it-up-and-go attitude toward long-distance family vacations could nudge gasoline prices somewhat higher.

The drop in natural gas prices follows cutbacks in gas use by manufacturers, primarily of aluminum, fertilizer and chemicals. Gas demand will tighten if most of this production is resumed this summer and fall.

And the nation remains dependent on a fragile energy transportation and refining infrastructure.

The wild card is Saddam Hussein's decision to cut Iraq's crude oil production by 2 million barrels a day in retaliation for a campaign by Britain, backed by the Bush administration, to clamp down on Iraqi oil exports that violate United Nations sanctions. Analysts are divided over whether the Iraqi cutback will be limited and essentially offset by increased production from Saudi Arabia, or whether it will be extended, halting an expected decline in crude oil and product prices.

On this, Sieminski is among the pessimists. "I think this could be a mess."

http://www.washingtonpost.com/ac2/wp-dyn/A37528-2001Jun7?language=printer

-- Martin Thompson (mthom1927@aol.com), June 08, 2001

Answers

Has the Y2K "Energy Crisis Flood" crested? Is the embedded system repair rate now surpassing the continuing failure rate, for the first time since the rollover?

If Y2K is the root cause of the energy bottlenecks and resulting shortages, the problem will fade away as mysteriously and inexplicably as it appeared.

Then, when it returns in a few years, or even a decade or so from now, it will be the Real McCoy: Fossil fuel maximum production will first fall, to match the demand. Then the REAL crunch will hit.

-- Robert Riggs (rxr.999@worldnet.att.net), June 08, 2001.