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Energy Price Volatility and the Energy Security Trust

Peter Grossman's picture
Associate Professor Butler University
  • Member since 2002
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  • Mar 29, 2013 10:30 pm GMT

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energy marketsDo politicians understand anything about energy markets? Even things like facts?

In a speech at the Argonne National Lab President Obama declared that we need the $2 billion Energy Security Trust, “… to really break this cycle of spiking gas prices, the only way to break that cycle for good is to shift our cars entirely — our cars and trucks — off oil,” and run them instead on homegrown biofuels, natural gas and electricity. The presumption has to be that these fuels have little or no price volatility.

But are prices in other energy markets actually very stable?  One would think that a resource like homegrown biofuels, for example, would be stable.  Grown and processed here.  Shouldn’t change from week to week month to month. Right?

Well actually, no.  Last summer the price of good old American-made ethanol on the Chicago Board of Trade rose more than 35 percent in about a month between mid-June and mid-July. There were no price swings that big in the gasoline market. In fact, as a general matter, whenever the price of corn rises or even is expected to rise, the price of ethanol is likely to follow.

What about natural gas? In the past, natural gas was very volatile; swings in natural gas prices contributed to the California electricity crisis in 2000-01.  But things have changed, no?  The price of natural gas has been very low the last few years because of the large resources made available because of hydraulic fracturing and horizontal drilling.  So obviously prices will stay low and move sedately.  Right?

Alas, in 2012, the price of natural gas plunged more than 30 percent during the winter only to rise almost that much in just one month—May to June.  Then it rose another 20 percent from September to November.   There is no reason to expect it to settle down in the years ahead.

So that leaves electricity, and surely electricity prices didn’t change much.  Well,if you take a look at the futures market pricing of wholesale electricity in the past year, you’ll see it was anything but steady and stable: there were several spikes of over ten percent in both directions. As for the future, with RPS standards that have guaranteed purchase agreements for renewables, prices of electricity will likely both rise and become more volatile.

Here’s the basic point: All energy markets are volatile at times, sedate at others. If the Energy Security Trust is really about saving the American consumer from price swings, it will fail.  But then as my new book, U.S. Energy Policy and the Pursuit of Failure (Cambridge), details, that has been the end of most energy legislation for the past 40 years.

Peter Grossman's picture
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Veronique Bugnion's picture
Veronique Bugnion on Mar 29, 2013

Thanks for the post! I’d love to see a companion post on the role of correlation between markets and energy security. One benefit of the US’ shale gas boom is that it has decoupled the gas market from oil, making it (and the electricity markets it drives) less sensitive to global oil market vagaries, so at least transport fuels, natural gas and electricity now don’t necessarily move in the same direction at the same time.

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