Jan 09 Here’s Why You’re Paying More For Energy This Year
It’s no secret that energy prices have skyrocketed. You saw it at the gas pump all summer, you feel it in your utility bill.
There’s a lot of conflicting information swirling around about the energy price increases. And even though we’re currently seeing a price dip at the pumps, you’ve probably been hearing and reading about the increases that are coming this winter. It can be difficult to separate the facts from the fear-mongering, so we’ve done our best to take an objective look at what’s going on in the world and how we know it’s impacting energy prices—no speculation here; just the facts.
UKRAINE, RUSSIA AND THE EU
In response to the war in Ukraine, the European Union banned Russian oil imports. That ban went into effect on December 5th, 2022.
Currently, officials from the Group of Seven (G7) are enforcing a $60 per barrel price cap on Russian oil prices for the non-EU countries that continue to import it. Russia’s response was that should this happen, it will stop selling oil to countries that impose this cap… which, according to analysts, will cause oil prices to increase.
ENERGY PRICES AND THE US SUPPLY CHAIN
The US Strategic Petroleum Reserve released the last batch of its primary reserves, the reserves President Biden authorized to release in March 2022, in December. The Strategic Petroleum Reserve may release more of its resources in 2023. However, we can’t rely on these reserves forever—they’re currently at their lowest point since the mid-1980s.
Our domestic energy issue isn’t just oil. Natural gas prices are currently at a 14-year high. There are a few reasons why:
- A hot, hot summer had people cranking the AC, sucking up electricity (which is largely produced using natural gas)
- Low natural gas inventory levels in the US
Natural gas inventory is down here because production is down. Production is down for a few reasons:
- Decreased demand during the COVID lockdowns (less driving, entire buildings and complexes closed). Production still hasn’t gotten back to where it was pre-lockdowns
- Wall Street putting pressure on oil and gas companies to focus on returning cash to investors via stock buybacks and dividends
WHAT ABOUT DIESEL?
Despite gasoline prices’ volatility over the past year, you’ve undoubtedly noticed prices drop from the record highs they hit earlier in 2022. If you’re a diesel driver, you’ve probably noticed that diesel prices haven’t dropped—and that they’re still right around $5 per gallon.
The reason for this is fundamentally the same as the reason for the volatility we saw with gasoline prices: supply and demand. But with diesel, there are a few different details at play.
While most passenger vehicles use gasoline, the majority of commercial trucks take diesel fuel. Because trucks continued to deliver goods through the COVID pandemic, demand for diesel remained near its pre-pandemic levels. But diesel refining went way down as refineries slowed production to meet reduced gasoline demand. So today, the US has very low diesel reserves—nationally, at levels not seen since 2008. In some regions, such as the Northeast, reserves levels are even lower. In the Northeast, for example, diesel reserves are at their lowest point since 1990.
That’s part one of the issue.
Part two is Europe’s sanctions against Russian energy imports. That means more overseas buyers will be in the market for US diesel, which means higher demand and thus, higher prices for its limited supply.
Stateside, refineries have largely ramped up production to meet the growing demand for diesel. That demand largely comes from Europe and the existing US logistics industry.
But then there’s the issue of transporting diesel within the US. In theory, producers in the South could transport diesel to the Northeast to alleviate shortages there…but, the Jones Act, aka the Merchant Marine Act of 1920, prohibits foreign vessels from transporting US goods between US ports. The 55 US-owned tankers are currently in use, which leaves the energy industry without an easy solution. It’s possible to temporarily waive the Jones Act, but that waiver would have to come from the Department of Homeland Security.
WHAT DOES THIS MEAN FOR MY BUSINESS, MY HOME, AND MY FAMILY?
To put it bluntly, energy prices are going up. According to analysts cited by USA Today, there’s still room for them to rise.
The tough truth is, there’s no easy solution to the rising energy prices. Like every other market, the energy market is driven by supply and demand. With one of Europe’s main suppliers suddenly exiting their market, Europe is scrambling to keep residents supplied—and that has a ripple effect on markets across the globe.
In the long-term, we could see a pivot to increase production or to aggressively invest in other energy sources. It’s quite possible we’ll see both. In the short-term, we’re paying more to keep our homes and businesses lit and warm.
Joshua Chananie, CPA is a Partner with Sax and Leader of the firm’s Consumer Products Practice, concentrating on advising clients on the key areas critical to their success. With more than 15 years of experience, Josh specializes in distribution and inventory management, shareholders agreements, profitability, succession planning, financial strategy, operational efficiencies, risk management, and tax challenges. He can be reached at [email protected].