2002 Energy Outlook for the Vancouver Columbian Outlook Conference

January 31, 2002
by Terry Morlan

At this time last year, the region was experiencing extremely high energy prices. We were looking ahead to a summer of possible electricity shortages and continued high wholesale electricity prices as forecasts of hydroelectric output were affected by the second worst water year on record. The Northwest Power Planning Council warned of decreased electrical reliability for this winter as well. In my outlook for the Columbian last January, I predicted that then current high electricity, oil and natural gas prices may last another year or two, but could also end more quickly given favorable conditions.

In fact, the high prices lasted less than six months after my outlook was presented. Further, the West made it through the summer without any power interruptions and the Northwest Power Planning Council's outlook for this winter now predicts a reliable power system. Prices for oil, natural gas and electricity all decreased dramatically during 2001. Crude Oil prices fell from $28 a barrel to less than $20 between January and November 2001. Natural gas prices fell from $8.12 per million Btu to $2.40 during the same period. Electricity prices collapsed from $250 per megawatt-hour in January 2001 to the low $20s at the end of November.

What accounted for this dramatic turnaround in energy markets? In the cases of natural gas and oil, the drop in energy prices should be viewed as normal commodity cycle phenomenon. High prices and shortages led to decreased demands and increased supplies. Oil and natural gas prices were further weakened by a stagnating economy, both in the U.S. and abroad, and switching of many large industrial natural gas users to oil played and important part in reducing natural gas demand.

The change in regional electricity markets, however, went far beyond normal commodity cycle supply and demand responses, it was a result of crisis response on several fronts. Electric utilities bought out the demand of their large customers, instituted emergency conservation programs and purchased temporary emergency generation capability. Operators of the federal hydroelectric system invoked emergency provisions in the recovery plan for endangered salmon to increase hydroelectric generation during last winter and summer. The region's governors made public pleas for electricity conservation and the media kept news of the electricity crisis on the front pages.

These actions, combined with normal market responses, succeeded in averting electricity shortages last summer and established an outlook for a reliable power supply for this winter. Their most significant effect was to dramatically decrease the demand for electricity. By July 2001 electricity consumption had decreased by 20 percent from levels of the previous July. Two thirds of the decrease was due to large electricity intensive plants closing down in response to high prices, a weakening economy and utility buy-out programs. None of the region's ten aluminum smelters are currently operating. The shut down of the region's aluminum industry alone accounted for a 12 percent drop in electricity demand, enough electricity to serve two cities the size of Seattle.

Demand reductions and additional supply combined to help refill of the region's reservoirs in preparation to meet this winter's electricity demand. The additional storage and negotiated flexibility in the use of water from Canadian reservoirs have helped improve the outlook for electricity supplies this winter.

This was not all good news, however. The successful aversion of electricity shortages came at the expense of regional jobs and incomes and at the expense of salmon whose survival was adversely affected by emergency operations of the hydroelectric system.

The outlook for this winter's energy markets is for adequate supplies and mostly reasonable prices, although prices will remain volatile and could increase dramatically during extreme cold weather periods. This outlook for electricity markets is based on expectations of a continued weak economy and the continued closure of aluminum plants. Terms of buyout agreements and a very weak aluminum market have kept these plants offline even though electricity prices have declined recently. The outlook for next summer should be good as well with the addition of new generating capacity and the assumption of better hydroelectric conditions. New natural gas supplies should continue to come on line and storage levels are in good shape for the coming winter. Oil prices are not likely to rebound during a continued global economic weakness absent a major disruption in the Middle East.

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