SBE Council Small Business Fact of the Week

Energy Outlook

Energy costs and trends obviously matter a great deal to entrepreneurs and small businesses.  The U.S. Energy Information Administration released its latest "Short-Term Energy Outlook" on June 12.  A few items are worth noting:

• On the good news front regarding gasoline: "After rising to a weekly record-level nominal price of $3.22 per gallon on May 21, retail regular motor gasoline prices have started to recede as refinery problems are addressed and gasoline imports increase."

• But, at the same time, on the negative side: "Strong demand for gasoline combined with low gasoline inventories and crude oil prices that are expected to average over $65 per barrel for West Texas Intermediate (WTI) are likely to keep gasoline prices over $3 per gallon through the summer months."

• Regarding the supply-side of oil: "Commercial inventories have dropped considerably since the end of September, reflecting strong oil demand growth, production cuts by members of the Organization of Petroleum Exporting Countries (OPEC), and only modest increases in non-OPEC production, all of which contribute to tight global crude oil markets. So far, OPEC members have not committed to raising output, perhaps waiting for a further reduction in Organization for Economic Cooperation and Development (OECD) inventories cover before acting. Uncertainty about OPEC members' plans to increase output, as well as ongoing geopolitical concerns including the loss of Nigerian production have left crude markets vulnerable to continued supply risks and volatility over the coming months."

• On gasoline inventories: "Motor gasoline inventories are projected to be tight during the summer season. These inventories, which normally increase in April, declined instead as a result of refinery maintenance problems and low imports, based on preliminary data. Total gasoline stocks increased by 8.2 million barrels in May to an estimated 201.5 million barrels, but that was still 13 million barrels less than at the end of May 2006. The inventory situation is likely to keep gasoline prices high, resulting in higher refinery profit margins than those seen last summer."

• Finally, as for natural gas prices: "The Henry Hub natural gas spot price is expected to average $7.96 per thousand cubic feet (mcf) in 2007, a $1.02-per-mcf increase from the 2006 average, and to average $8.15 per mcf in 2008."

All of these same factors point to longer term risks on energy prices as well.  What could our policymakers do to make a difference? The answer should be obvious: remove regulations, taxes and restrictions that limit our ability to expand energy exploration, development and production.

Raymond J. Keating, Chief Economist