ENERGY PRICES CONTINUE UPWARD TREND
by Joseph Dancy, LSGI Advisors, Inc.
Adjunct Professor, SMU School of Law
November 16, 2007

As we have noted for several years now the supply and demand balance for both crude oil and natural gas remains bullish for energy sector investors. Last month the following events occurred in the sector that are of interest to investors:

• Oil for heating use will cost customers nearly 22 percent more than they paid last winter according the U.S. Energy Information Administration. 

• "Prices of propane and heating oil have never been higher at the start of the heating season," said Jim O'Neal, energy analyst with Wisconsin’s Office of Energy Independence. He's forecasting home heating oil costs to rise by 25% to 30% from last winter, and propane prices to rise by 10 to 15%. Prices of those fuels track closely with the price of crude oil, which touched a record above $90 a barrel

• The Energy Information Administration projected the cost of heating with electricity will average 7.1 percent more than a year ago. Heating with natural gas will cost 10.1 percent more than in 2006.

• China is rationing diesel at pump stations in at least four booming coastal provinces in the widest-scale rationing seen since 2003, as rising global oil prices hit output at loss-making Chinese refiners. "We are rationing. Supplies are getting short," said a sales executive with top refiner Sinopec Corp. 

• In an effort to ease the pressure of diesel shortages, China's economic regulator announced an almost 10% increase in domestic gasoline and diesel prices, calling the move an "urgent step" needed to dampen demand and encourage refiners to ramp up production. The price hike is a means to alleviate the shortages in China as the worst fuel crisis in two years has spread to the capital and other inland areas.

• Canadian natural gas output could skid by as much as 15 percent in the next two years because energy companies have cut back on drilling to cope with high costs, middling prices and a strong domestic currency, the country's energy regulator said. The National Energy Board said gas delivery from Canada -- the main source of imported supplies for the United States -- could fall to 14.5 billion-15.8 billion cubic feet a day by 2009 from 17.1 bcfd at the end of 2006.

• Leading figures from the Middle East oil industry added their voices to those warning that the world is struggling to sustain crude oil production. "There is a real problem - that supply may not be possible to increase beyond a certain level, say around 100 million barrels," Libya's National Oil Corp chairman Shokri Ghanem said at an industry conference. "In some countries production is going down and we are not discovering any more of those huge oil wells that we used to discover in the Sixties or the Fifties" added Sadad al-Husseini, a key architect of Saudi Arabian energy production policy for more than a decade. 

© 2007 Joseph Dancy
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Joseph Dancy, Adjunct Professor
Oil & Gas Law, SMU School of Law
Advisor, LSGI Market Letter
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