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