With the summer winding down and fall and winter approaching, you may be wondering what it’s going to cost to heat your home office. Although difficult to predict, a report called Short-Term Energy Outlook (STEO) from the U.S. Energy Information Administration (EIA) provides a glimpse of projected energy costs during the upcoming winter season. Unfortunately, the outlook is strongly leaning one way - much higher energy costs this winter compared to last.
The EIA, established in 1977, is the statistical division of the U.S. Government’s Energy Department and is responsible for collecting and analyzing data on coal, petroleum, natural gas, electric, renewable, and nuclear energy. Through the dissemination of energy information, the EIA promotes sound policymaking, efficient markets, and public understanding of energy and its interaction with the economy and the environment.
Each month, the STEO provides forecasts through the end of the next calendar year for consumption, supply, trade, and prices across major fuel types. In addition, the STEO provides in-depth market analysis for crude oil, petroleum products, and natural gas markets. Although its emphasis is on U.S. energy markets, the STEO also includes forecasts for certain international liquid fuels markets.
The EIA is forecasting lower global consumption of petroleum and other liquid fuels due to lower global economic growth and the COVID-related lockdowns in China. However, U.S. consumption is projected to return to 2019 levels and to increase slightly in 2023.
The EIA is forecasting both increased oil production in non-OPEC and OPEC countries. The U.S. is projected to lead in production growth for non-OPEC countries followed by Brazil, Canada, and Norway. Low current inventories may limit some of the downward price pressure as production increases and inventories begin to build again.
Crude oil prices should remain high in 2022 but are projected to decline by year-end 2022 and fall further in 2023. Despite the fall in the price of crude oil, prices of refined products like gasoline and diesel fuel may not experience a corresponding decrease. This is due to the reduced exports of refined products from Russia as a result of sanctions over the war in Ukraine. In addition, U.S. refinery capacity is falling and the National Oceanic and Atmospheric Administration is predicting a higher than average hurricane season. Therefore, the high refinery utilization (aka low refinery capacity) could be affected by both operational and weather-related production stoppages late in 2022.
The EIA expects natural gas consumption to increase in the U.S. with the largest increase coming from the electric power sector. Despite currently high natural gas prices, the electric power sector continues to use high amounts of natural gas due to a decline in coal-fired plants as an alternative source of electricity generation.
Natural gas production in the U.S. is projected to increase as a key liquid natural gas producer comes back online.
Aerial View of Oil Refinery
Natural gas prices have been volatile in 2022, rising from $4.38 MMBtu in January 2022 to $8.14 MMBtu in May, before falling by 5% to $7.70 MMBtu in June. This is due to the uncertainty in global markets caused by the war in Ukraine. The EIA is forecasting an average of $5.97 MMBtu for the second half of 2022 due to increased and restored natural gas production. However, the limitation of using coal in the electric power sector will prop up demand for natural gas and in turn create a floor for prices in the second half of 2022.
The EIA is forecasting continued gradual decline in coal consumption with demand falling 3% in 2022 and another 4% in 2023.
Despite falling consumption, the EIA is projecting slight increases in coal production mainly to restore electric power inventories, which fell significantly in 2021. Production is expected to be flat in 2023.
The EIA is expecting average delivered coal prices to the electric power sector to increase slightly (6%) in 2022 before falling in 2023 to levels seen in 2021.
The EIA projects modest increases in electricity consumption in the U.S., rising slightly by 2% in 2022 and by another 1% in 2023.
The EIA has estimated that electricity generation grew by 4% in the first half of 2022 compared to the first half 2021, reflecting warmer than average temperatures in May and June. The EIA projects that full year 2022 generation will be 2% higher than 2021, with levels remaining about the same in 2023. Most of the increase in electricity generation through 2023 is expected to come from renewable energy sources. Renewable energy is projected to comprise 22% and 24% of U.S. electric power generation in 2022 and 2023, respectively, compared to 20% in 2021.
The sharp increase in natural gas prices is also driving wholesale electricity prices nationwide, with price increases ranging from 13% higher in the first half of 2022 (compared to the first half of 2021) in the southeast of the United States. This rises dramatically to 135% higher in the New York area. The higher prices for wholesale electricity contribute to the EIA forecast for higher prices retail customers. The average retail price is projected to be 5% higher in 2022 than it was in 2021. In addition, the forecasted increases will vary by region, ranging from 2% higher in the west south-central states to 14% higher in the New England region.
Given the forecasts of elevated prices in petroleum, natural gas, and electricity, expect to pay much more to heat your home and home office this winter, especially if you live in the Northeast United States.
So, what can you do to mitigate these higher costs?
It's no surprise if you’ve filled up your car’s gas tank lately that inflation has been hitting hard in 2022. And you may have gotten a taste of higher heating costs last winter compared to 2020 when energy costs were depressed due to COVID lockdowns. Unfortunately, according to the EIA, oil, natural gas, and utility supplied electricity prices will once again be higher this winter. How it affects you depends upon your particular heating fuel, your geographic location, and how well you act on the myriad of energy saving recommendations that tend to be published in the fall. I highly urge you to act now to get ahead of the curve. You’ll be thanking me in six months!