By Michael DeCaluwe, CEM | March 14, 2022
When we talk about the current bull market for energy, particularly natural gas and electricity, I’m reminded of an old saying from when I first started in the energy industry many years ago: “The cure for high prices is high prices.”
What does that mean?
When energy prices rise, producers/drillers are encouraged to produce more energy to make more money. This extra supply starts to oversaturate the market, and prices come down. So, the saying was true — high prices really do cure high prices.
What’s different about this market?
Production pressures driven by capital markets. The historic decade-long bear market for energy crippled investors’ funding for energy exploration. Many investors are now hesitant to return and the demand to invest in fossil fuels is lacking.
Without investment, the opportunity to take advantage of higher prices is limited.
History vs. Today’s Reality
Historically, gas and electricity were a domestic product that didn’t cross international borders and therefore the markets were shielded from international events.
We are currently in the middle of a bull energy market that has presented itself since last summer as a tornado. Now a hurricane is coming. A hurricane named Putin.
When Russia invaded Ukraine, it raised short-term fears about Europe’s energy supply. It also started long-term discussions about energy independence. Russia currently supplies about 30% of Europe’s gas and is also a major source of its coal.
Today, the U.S. exports about 10% of its natural gas supply, with plans to double that amount in the next few years. Although U.S. natural gas prices are still about one-sixth the world price, we are seeing international events affect our domestic gas market.
In the short-term, a variety of issues will influence our energy markets. But in the long-term, Europe and the global economy will continue to have a growing influence on our energy prices for gas and electricity.
There is no true way to know where our energy rates are. The most important thing to know is your own risk tolerance as an energy buyer and be ready. A volatile market can either be your friend or your enemy.
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