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Why This Time Could Be Different: Rising Oil Prices Are Being Offset By Falling Natural Gas Prices

Why This Time Could Be Different: Rising Oil Prices Are Being Offset By Falling Natural Gas Prices thumbnail
WSJ Blog— “Soaring oil prices in the spring of 2008 sent gasoline prices surging and accelerated the recession. Now, rising gas prices are threatening the recovery. But lower natural gas and utility costs this time around might limit some of the damage, says Deutsche Bank chief U.S. economist Joseph LaVorgna.In a note to clients last Tuesday, titled “Why this time could be different,” LaVorgna reminds us of his rule of thumb for measuring the effect of run-ups at the pump: a one-cent increase in gasoline prices increases household energy consumption by about $1.4 billion. With the 29-cent jump in gas prices over the past two months, that would translate into about $40.6 billion in higher household energy costs.

Today, he says the economy can handle the higher oil prices “provided that they do not increase substantially further and remain at elevated levels on a longer-term basis.”

One key reason: Lower natural gas prices, and lower utility consumption (including electricity) due to a warm winter, are offsetting much of the higher oil costs. LaVorgna puts the benefit from both at about $16 billion, or almost half of the recent run-up in gasoline prices (assuming gasoline prices hold near their current levels).”

MP: The chart above shows the historical relationship between monthly natural gas prices (data here) and crude oil prices (data here) with both price series converted to index equal to 100 in January 2002.  Both oil and natural gas prices spiked in 2008, and both series rose together and more than doubled between mid-2006 and mid-2008, and then both fell together through early 2009.  Since then oil prices have increased by 2.5 times, from about $40 in February 2009 to more than $100 today.  In contrast, natural gas prices have fallen by about 50% since early 2009, from about $5 to $2.50 per million BTUs.  The huge departure over the last few years from the typical historical, positive correlation between oil and natural gas prices explains why this time really could be different, as Joe LaVorgna suggests.

Update: PPL Electric Utilities in Pennsylvania just announced that it will lower electricity prices for 586,000 residential customers by almost 11% on March 1.  A company spokesman said that the lower rates were partly because of the abundance of natural gas, which has been driving down the cost of electricity generation.  (HT: John Hanger)

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4 Comments on "Why This Time Could Be Different: Rising Oil Prices Are Being Offset By Falling Natural Gas Prices"

  1. Beery on Sun, 26th Feb 2012 11:42 pm 

    Natural gas and crude oil perform two very different functions. To assume that the two can cancel each other out when their prices go in opposite directions is ludicrous. It just shows how desperately some folks are clinging on to the hope that we’re not staring into the abyss.

    Nietsche was right when he said that if you look into the abyss, the abyss looks into you. The fear of the repercussions of peak oil is certainly showing the character (or rather the lack of it) in many cornucopians. As the price of oil keeps on rising, look for many of them to deny their earlier assurances of the ‘myth’ of Peak Oil.

  2. Kenz300 on Mon, 27th Feb 2012 12:02 am 

    Oil has a monopoly on transportation fuels. Cars, trucks, boats, planes they all run on oil. We need some choice and competition for transportation fuels. Bring on the electric, flex-fuel, CNG, LNG and hydrogen fueled vehicles. While there is no silver bullet it would be nice to have some choice and competition. Long haul truckers are starting to convert to LNG saving on fuel costs. Monopolies are not good for consumers. They are only good for the monopoly.

  3. Anvil on Mon, 27th Feb 2012 11:15 am 

    And the bad jokes just keep coming until my ears bleed.

  4. BillT on Mon, 27th Feb 2012 12:50 pm 

    “…(assuming gasoline prices hold near their current levels)…”

    We all know what to ‘ass u me’ means. And gasoline prices have just started to climb.

    As for PPl. Most of their electric generation comes from coal, hydro-electric dams and nuclear, not natural gas.

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