Hi Uncledrz,
I don't think energy markets are being manipulated. It does seem to me that there is a high degree of speculation that is pushing prices higher though. Although there are long-term fundamental reasons for higher energy costs, I don't think they adequately explain the explosion in energy prices. The natural gas market is a perfect example.
Because it is difficult and costly to ship natural gas internationally, gas markets tend to be local, rather than global, in nature. Therefore, the price of gas in North America should be determined by supply / demand factors specific to that region. Historically the domestic price of gas has generally tracked gas storage levels with "below average" storage resulting in higher than average prices and vice versa.
However, North American natural gas capacity has plateaued while demand continues to rise. Over the long-term domestic sources of gas may be challenged to meet the growing demand. Companies are starting to build LNG import capacity which should be coming on line in a few years, but LNG will still be a relatively small portion of the total North American gas market. Furthermore, most LNG imports are only economic with gas prices above $4 / Mcf, meaning our days of $2 gas may be over.
We're all dead in the long-run though. In the here-and-now gas prices should be set by current supply demand fundamentals as reflected in current gas inventories. Coming out of the 2004-2005 winter heating season gas inventories were ABOVE NORMAL. Analysts scratched their heads at $6 / Mcf gas prices when gas stocks heading into the summer injection cycle were above historic averages. Conventional wisdom coalesced around the idea that high oil prices were supporting natural gas. The theory went that the marginal users of natural gas (those that set the price) were able to substitute gas usage for oil. A barrel of oil has about 6 times the amount of energy (BTUs) as a Mcf of gas, so at $40 oil a $6 gas price seemed reasonable not withstanding high gas inventories - and all was well with the universe.
An extremely hot summer this year resulted in above average natural gas usage (nearly all of the power plants built over the past 5-10 years are natural gas fired so gas is increasingly being used for cooling as well as heating). By the end of summer we ate through the surplus gas, but inventories were still normal by historic standards.
Now two hurricanes move through the gulf coast forcing a significant amount of our natural gas production to be shut in. Sub-sea pipeline damage could keep production down for a while. Unless production is brought back soon, inventories could drop below normal.
But we're still talking about natural gas inventory at levels close to their historic averages. A cool winter could very well bring us back to or above normal. Variations of this sort used to have gas bounce between $2 to $3 - not $6 to $14. Even the argument that oil is supporting gas as a substitution fuel no longer holds with oil ($60-$70 / barrel) trading below the BTU equivalent of natural gas ($72-$84 / barrel equivalent).
I'm not sure where all this ends but you have to wonder if our economy can cope with $14 gas and $70 oil for any sustained period. International economies that are less efficient than the US, and more dependent on industrial production, are less able to cope. It seems to me that there is a lot of froth in energy markets currently. If global GDP begins to buckle under the weight of these extreme energy prices we could see a very sharp correction in the price of oil and natural gas.
Until then, stock up on wood.
