Fire sale on stuff that burns: Oil, nat­u­ral gas, coal down

The China Post - - WORLD BUSINESS - BY JONATHAN FA­HEY

These days it seems what­ever can be burned to power a car, heat a home, make elec­tric­ity or ship peo­ple and goods around the globe is be­ing sold at bar­gain base­ment prices.

Prices for coal, nat­u­ral gas, oil and the fu­els made from crude such as ga­so­line and diesel are all far less ex­pen­sive than they have been in re­cent years.

Con­sumers are re­joic­ing. Fos­sil fuel com­pa­nies are reel­ing. Coun­tries that im­port energy, such as the U.S., main­land China, Ja­pan and those in the Euro­pean Union, are get­ting an eco­nomic boost. Ex­porters, such as Rus­sia, Saudi Ara­bia and Venezuela are fac­ing lower in­come and bud­get short­falls.

Com­modi­ties in gen­eral are slump­ing. The S&P global com­mod­ity in­dex hit its low­est level since 2002 on July 27, lower even than dur­ing the 2008 global fi­nan­cial cri­sis.

The re­cent price declines are a re­sult of com­plex fac­tors that have led to a sim­ple out­come: There is more than enough fos­sil fu­els at the ready than cus­tomers need.

“We just have too much energy hit­ting the world,” says Suzanne Min­ter, man­ager for oil and gas con­sult­ing at Ben­tek Energy, a di­vi­sion of Platts.

Crude Oil

Price: Av­er­age for the year through July is US$53 a bar­rel, down 48 per­cent com­pared with the same pe­riod last year and on track for its low­est an­nual av­er­age since 2004. On Mon­day U.S. crude posted another sharp de­cline, fall­ing 4 per­cent to US$45.17 a bar­rel.

Rea­son: Huge in­creases in oil pro­duc­tion in the U.S. and Canada, along with siz­able gains in Iraq and else­where, helped boost global sup­plies. Saudi Ara­bia and other OPEC na­tions kept pump­ing crude at high lev­els. Ira­nian crude could soon re­turn to the mar­ket af­ter be­ing kept off by sanc­tions. Mean­while, global de­mand for crude is not as strong as ex­pected be­cause China’s growth has cooled and other economies have be­come more energy ef­fi­cient.

Fu­els

Ga­so­line: The av­er­age U.S. re­tail price is down 30 per­cent through the first half of the year. It is now US$2.65 a gallon, ac­cord­ing to the Amer­i­can Au­to­mo­bile As­so­ci­a­tion (AAA), lower for this time of year than any other year over the last decade ex­cept 2009.

Diesel and heat­ing oil: Av­er­age re­tail prices for both are down 27 per­cent.

Rea­son: When oil prices fall, the cost for re­fin­ers to turn it into petroleum prod­ucts and fu­els goes down. U.S. re­finer­ies have been run­ning at full strength, and big new re­finer­ies in Saudi Ara­bia and else­where have added to global sup­plies of fu­els.

Nat­u­ral Gas

Fu­tures: U.S. fu­tures have av­er­aged US$2.77 per thou­sand cu­bic feet through the first half of the year, 40 per­cent lower than last year.

Residential prices: Av­er­aged 9 per­cent lower through the first half of the year. For the full year, nat­u­ral gas is ex­pected to av­er­age US$10.27 per thou­sand cu­bic feet, the low­est since 2003, ac­cord­ing to the U.S. Energy Depart­ment.

Rea­son: U. S. pro­duc­tion is strong. Rel­a­tively mild weather has tem­pered de­mand for heat­ing and elec­tric power plants. Around the world, nat­u­ral gas prices have also fallen be­cause they are of­ten linked to the price of crude and pro­duc­tion of liq­ue­fied nat­u­ral gas that can be shipped over­seas is ramp­ing up.

Coal

Price: The av­er­age price of coal used for elec­tric­ity from Cen­tral Ap­palachia is 20 per­cent lower than last year, ac­cord­ing to Platts. In June, the price hit an eight-year low.

Rea­son: Coal is sit­ting in piles or be­ing left un­der­ground as U.S. elec­tric power gen­er­a­tors burn cheap nat­u­ral gas in­stead. In April nat­u­ral gas briefly over­took coal as the top fuel for elec­tric power for the first time.

De­mand for coal is grow­ing glob­ally, but lo­cal min­ing ca­pac­ity is also grow­ing. Pol­lu­tion con­cerns and slower global eco­nomic growth are also keep­ing a lid on coal de­mand.

Coal con­sump­tion could fall even more dra­mat­i­cally if rules an­nounced Mon­day by Pres­i­dent Barack Obama to limit car­bon diox­ide from elec­tric power plants

sur­vive ex­pected le­gal chal­lenges.

How Low Prices Help

Lower energy prices are good for con­sumers, giv­ing them more money to spend, and for the broader econ­omy. Con­sumer spend­ing ac­counts for about two-thirds of the U.S. econ­omy.

While sales at re­tail­ers haven’t spiked, as econ­o­mists thought they might, con­sumer spend­ing is grow­ing faster than the over­all econ­omy, sug­gest­ing lower fuel prices have helped.

“It’s not this huge boost in spend­ing but it is very good news, re­liev­ing pres­sure at a time when wage growth is not very strong,” says Na­ri­man Behravesh, chief economist at IHS.

He cal­cu­lates that the de­cline in ga­so­line prices is sav­ing cus­tomers about $800 a year com­pared with what they were spend­ing be­tween 2010 and 2014.

How Low Prices Hurt

Energy com­pany prof­its and share prices have been crushed. Quar­terly earn­ings dropped 52 per­cent at Exxon and 90 per­cent at Chevron, the com­pa­nies an­nounced last week.

On Mon­day Al­pha Nat­u­ral Re­sources be­came the fourth U.S. coal com­pany to seek bank­ruptcy pro­tec­tion in the last 15 months.

The lower rev­enue and profit are tak­ing a toll on em­ploy­ment. The U.S. coal in­dus­try has lost 21,000 work­ers since 2011, ac­cord­ing to the U.S. La­bor Depart­ment, a de­cline of 24 per­cent.

Chevron, BP and Shell last week all an­nounced work­force re­duc­tions. Lay­offs at three of the big­gest oil and gas ser­vice com­pa­nies — Sch­lum­berger, Hal­ibur­ton and Baker Hughes — are ap­proach­ing 60,000 since the price de­cline be­gan.

AP

In this July 16 photo, a woman holds a fuel pump noz­zle to fills up her car at a Costco gas sta­tion in Robin­son Town­ship, Penn­syl­va­nia.

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