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Impact Report – By Sector

A Look at Oil, Fuel, Natural Gas and Electricity Prices.

By Mark S. Kuhar

Crude Oil
The U.S. Energy Information Administration (EIA) expects the U.S. average refiner acquisition cost of crude oil will rise from $100 per barrel in 2011 to $107 per barrel in 2012 as global spare production capacity and inventories continue to decline. This forecast assumes that U.S. real gross domestic product (GDP) grows by 2.4 percent this year and 2.6 percent next year, while world oil-consumption-weighted real GDP grows by 3.4 and 4.1 percent in 2011 and 2012, respectively. These assumptions do not fully reflect recent economic and financial developments that point toward a weaker economic outlook and also contributed to a sharp drop in world crude oil prices during the first week of August. There is a significant downside risk for oil prices if economic and financial market concerns become more widespread or take hold.

Fuel Prices
Off-road diesel fuel prices hovered around $3.60 per gallon in August. Regular-grade gasoline monthly average retail prices fell from $3.91 per gallon in May to $3.65 per gallon in July, reflecting the decline in crude oil prices from their April peak and a recovery from unexpected refinery outages. Projected regular-grade gasoline prices average $3.58 per gallon and $3.44 per gallon in the third and fourth quarters of 2011, respectively, about 6 cents per gallon below last month's Outlook.

Natural Gas
Extremely hot weather settled on much of the nation last month, with U.S. population-weighted cooling degree-days 27 percent higher than the 30-year normal and 8 percent higher than last year, which contributed to an increase in natural gas consumption for electricity generation compared with July 2010. Nevertheless, the estimated 246 billion cu. ft. (Bcf) increase in natural gas working inventories during July 2011 was 21 Bcf higher than during the same month last year.

Natural gas working inventories ended July 2011 at 2.8 trillion cu. ft. (Tcf), about 7 percent, or 194 Bcf, below the 2010 end-of-July level. EIA expects that working natural gas inventories will build strongly, approaching last year's high levels by the end of this year's inventory build season. The projected Henry Hub natural gas spot price averages $4.24 per million British thermal units (MMBtu) in 2011, $0.15 per MMBtu lower than the 2010 average. EIA expects the natural gas market to begin tightening in 2012, with the Henry Hub spot price increasing to an average of $4.41 per MMBtu.

According to the National Oceanic and Atmospheric Administration, U.S. population-weighted cooling degree-days during July was the highest recorded monthly value since at least the 1930s. This Outlook estimates that retail sales of electricity to the residential sector during July were slightly higher than the record-setting 5.02 billion kilowatt hours per day (kwh/d) consumed during July of 2010. EIA expects total consumption of electricity during 2011 to grow by 0.5 percent from last year's level and by 1.1 percent in 2012.

Hydroelectric generation by the electric power sector averaged 946 million kwh/d during the months of January to May 2011, which is 252 million kwh/d (36 percent) higher than the same period last year. Most of this increase in hydropower occurred in the West Census region, where natural gas was displaced as a generating fuel, falling by 159 million kwh/d year-over-year. In contrast, the low cost of natural gas relative to Appalachian coal drove up the use of natural gas as a generation fuel in the eastern regions of the U.S., increasing by 244 million kwh/d during the first five months of this year compared to the same period in 2010. EIA expects a 3.5-percent increase in U.S. natural gas generation during 2011 and an increase of 3.3 percent next year.

The regulatory lag in passing through changes in generation costs should lead to a 2.3-percent increase in the average U.S. residential retail electricity price during 2011, in response to the increase in natural gas fuel costs last year. Relatively stable fuel costs this year translate into little growth in retail rates during 2012.