Coping With Unstable Energy Prices

The unstable energy prices we are experiencing will last into the foreseeable future. This article and a few more coming soon discuss what is happening, what to do about it, and how you and your customers can profit from it.

Analysis

First, we need to understand the major contributing factors that got us where we are today:

Failure to learn from the past — During the oil embargo in the mid-70s, people were buying so many small, fuel-efficient cars that the market for heavy, gas-guzzling American-made icons was virtually nonexistent. Lee Iacocca, then chairman of Chrysler Corp., said, “Americans want economy so bad they will pay anything to get it.”

Twenty-five years later, we are buying so many heavy, low-mpg SUVs that waiting lists for popular models are as common as an insincere car salesperson.

We don’t control the supply of oil — With 50 million more cars now than in the 70s, we are more dependent on foreign oil than at any time in history; 40% of the world’s supply of oil is produced by OPEC (Organization of Petroleum Exporting Countries) members. When in agreement, OPEC ministers can greatly affect the world price of oil through production increases and cutbacks. Every dollar OPEC increases the cost of oil adds $30 million a day in member revenue.

The world economy is growing — Growing economies like China (one-fourth of the world’s population) need more oil every day. Asia will soon require oil imports equaling one-half of Saudi Arabia’s annual production; 50% of the world’s population is entering the age of consumerism and oil is tied in some way to virtually every product manufactured. When supply is limited and demand grows, prices rise.

Oil can affect electricity costs — Many electric utilities, like those in Florida, use oil for base-load generation. In other parts of North America, oil is used for peak electric production. When the price of fuel needed for generation increases, most utility companies are allowed to pass this cost directly to their customers in the form of fuel adjustment charges.

We ran out of “cheap” electricity — Even though our economy has grown at a record rate, we have built virtually no base-load power plants in North America in the last 20 years. These plants are the most cost-effective means of producing electricity. They typically use less-expensive fuels and are efficient because of their size and continuous operation.

Peak electric prices are unstable — About 95% of new electricity will be produced at peaking plants. Imagine a jet engine connected to a generator and you get the idea. The fuel of choice for these plants is natural gas. Natural gas generation will increase from 15% to 50% by 2009.

Good news is natural gas is a clean fuel produced in North America. The bad news is the price of natural gas will continue to bounce around like a BB in a box car.

Natural gas is a commodity — Natural gas was deregulated more than 10 years ago. Like other base commodities, wild price fluctuations are driven by supply and demand. Since we only have storage capacity for 20% of the peak demand for natural gas, a colder-than-normal winter can drive prices higher than the Hubble telescope.

Enter California

There’s an old saying that “When California sneezes, the rest of North America catches a cold.” If this is true, what happens when California is on the critical list? Because of price controls imposed by deregulation, the two largest utilities in the state are facing bankruptcy. Together they own $12 billion in purchased power they can’t pay for.

Still worse, the world’s sixth largest economy experienced rolling winter blackouts because the utilities are at maximum generating capacity. What makes this frightening is California is a summer-peaking state (residents use much more electricity in the summer for air conditioning than they do in the winter for heat). Unfortunately, there are no Christmas tree lights to turn off this summer if they run out of power.

But it’s not just California. Former Department of Energy Chief Bill Richardson said, “We’re headed for the mother of all power crises during the coming peak demand seasons.” Ten years ago, the demand for electricity was increasing by 2% per year. Today it is 3% and will soon increase to 4%.

If we were willing to live with the byproducts of high-sulfur coal, smoke stacks without scrubbers, and heavy metals in our drinking water, our electric prices would be much lower, but those costs are unacceptable. As we continue to protect our environment, energy costs will continue to rise.

Nuclear Energy

When properly designed, installed, and operated, nuclear power plants provide vast amounts of clean electricity at a fraction of the cost of other fuels. Nuclear energy could have been the answer to our power problems long into the future — if it wasn’t for a series of bone-headed mistakes at Three Mile Island, PA.

The worst accident in the history of commercial nuclear power in the United States occurred on March 27, 1979. The 880-MW #2 reactor experienced a partial meltdown and released radioactive gases into the surrounding countryside. It all started when a water softening line became plugged with resin. Lack of water caused pressure to increase in the reactor vessel, causing a relief valve to open and allowing the fuel to became superheated.

Not realizing that the relief valve was stuck open, operators cut back on the cooling water supply. Because the computer hadn’t been programmed for this chain of events, it started printing out question marks. Standard instrumentation, like thermocouples, were reading accurately, but operators weren’t trained to understand the significance. In fact, the readings were so high no one believed them.

After Three Mile Island, Rancho Seco, a nuclear generating facility in Northern California was mothballed as it was nearing completion. You can’t help but wonder if the power problems in California and North America would be a non-issue if it wasn’t for Three Mile Island.

The Good News

2001 and beyond will be the greatest time in history to sell high-efficiency heating and air conditioning equipment. My next article will deal with specifics of how to help your customers “select” their energy bills for the next 20 years.

Howard can be reached at 800-515-0034; Steve@NoPressureSelling.com (e-mail).

Publication date: 04/09/2001