So with all this doom and gloom news what advice
would we give a business? Our longer-term advice remains the same as
always. If your energy bills are a top-5 spend category for your
business, they should be integrated into your overall planning cycle
and tracked as separate budget line items. You should have a
procurement strategy in place with well-defined decision points as to
when you will purchase natural gas, electricity, etc. Energy prices
change constantly and opportunities come and go quickly. The time to
set clearly defined goals and assign decision-making authority is
before those opportunities arise. At Independent Energy Consultants we
deal with many suppliers and have access to a great deal of market
information and prognosticators. As painful as these prices currently
are, we are not seeing anyone lock-in a long-term price now. The
consensus has been and remains that this bubble has to burst as
speculators and technical traders will eventually be overruled by
market fundamentals. The long-term trend may be moving upward, but this
meteoric rise in the past 6-weeks is likely to give back some of its
gains, if winter subsides under normal conditions.
Times like this also point to the importance of entering a well
constructed contract, where the terms and conditions can be as or more
important than the pricing structure (see
July 2007 newsletter). For residential and small-commercial
customers, that means you want to be able to leave an energy agreement
with little or no penalty. For larger commercial or industrial
customers, it may mean the ability to hedge certain portions of your
needs, or the ability to extend a contract term if prices are lower in
the future months (backwardated market conditions).
Now a note about the emotionally charged aspects of paying utility
bills. Assuming your energy purchase decisions were made with good
information and you obtained the most competitive price at the time, we
believe you should move on and not second-guess yourself. Airlines are
filled with passengers who bought tickets at different times and for
different prices. Cars travel our highways filled with gasoline
purchased at various prices. Millions of people own the same publicly
traded stocks, but bought at different prices. Were all the people who
paid more lousy decision makers? Absolutely not! Just like gas tanks
get empty at certain times, our energy contracts expire at discrete
points in time. Will those contracts be renewed under the most
favorable conditions? Maybe, maybe not. That's were a strategy comes
into play and the decision makers must take a view of the market to
determine what type of pricing to accept and how long to commit.
Now that we've discussed current market conditions, I think it is
worthwhile to talk briefly about the longer term and what the future
might hold. Most industry experts agree that reducing our consumption
of energy is helpful and we have made tremendous progress in the past
30 years. Most also agree that unless and until our nation addresses
fundamental supply-side issues and implements a serious national energy
policy, consumers are likely to see increasing prices and be exposed to
more rapid movements in prices. For those of you old enough to remember
the energy crisis of 1973, this next fact alone should be cause for
concern. In 1973 at the time of the Arab Oil Embargo the U.S. imported
26 percent of its energy. Today our dependence on foreign oil has more
than doubled and we import about 60% of our needs!
The world is arguably more dangerous today and the U.S. appears to have
fewer friends in oil producing regions. For example, the OPEC Ministers
continue to manipulate oil supply output to prop prices up but keep
them just low enough so the "pain" doesn't become so great that we take
serious action to reduce our foreign oil dependency. According to the
August 12, 2006 edition of The Economist, the top 13 companies with the
world's largest oil and gas reserves control approximately 90% of the
world's reserves. What makes this particularly alarming, is the fact
that those are all national
companies owned by the foreign governments in unstable regions of the
world. When making energy purchases and trying to squeeze out every
penny of savings, it is worth remembering this fact. Similar to
financial investments, each energy purchase decision comes with its own
risk vs. reward characteristics. Please contact Independent
Energy Consultants if you would like help in identifying
your risk tolerance, market trends and the development of a strategy
that addresses both.
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