WASHINGTON -- What happened to the energy crisis?
A new Energy Department forecast Thursday predicted that gasoline pump prices will drop nearly a dime a gallon from the current average of $1.71 a gallon-far below the excited warnings of a possible $3-per-gallon price spike heard several months ago.
Natural gas prices, which soared last winter to over $10 for one thousand cubic feet, doubling heating bills for many consumers in northern states, fell to $3.56 in early June. That's nearly a 25 percent decline from the beginning of May, according to a Platts spot market price survey.
Even California's siege of record electricity prices has lifted significantly. Hourly spot market prices dropped to around $75 for one megawatt of power in California, the first time statewide prices have been below the $100 level since the state's energy crisis began late last summer, Platts reported. In April, the California Department of Water Resources, which had to take over power purchases for the state's insolvent utilities, paid an average of $284 per megawatt hour. Now it is able to buy power for this summer at half that amount, the department said.
"We've entered a period where it doesn't look as desperate as a month ago," said Peter Beutel, president of Cameron Hanover, a New Canaan, Connecticut energy risk management firm.
Analysts and economists surveying the price swings said it was a new variation on an old theme: The sharp spikes in energy prices over the winter have prodded consumers and companies to cut back fuel consumption.
"This shows what happens when you keep your hands off and let the markets work," said Gary Ross, chief executive of PIRA Energy Group, a New York consulting group.
Meanwhile high profits have caused a burst of new exploratory drilling for oil and gas and have cranked refining operations up as high as they can go. Mild spring weather has helped, too.
But analysts warned that the nation's energy infrastructure -- the pipelines, transmission connections and refineries -- is still stretched worrisomely thin. A range of variables, from harsh summer weather to an extended loss of crude oil production from Iraq, could send energy prices back up.
For now, the drop in energy prices was another demonstration of consumer power, analysts said.
California, battered by unprecedented power costs and warnings of summer blackouts, cut its electricity usage in May by 8 percent compared to the previous May, Beutel said.
"Conservation has had a big effect," he said. Normally, it takes a jolt of higher prices to trigger cutbacks in fuel usage. California's consumers have been shielded from much of the surge in power prices since last fall. But the threat was obvious and consumers reacted to it, he said.
Gasoline prices have dropped primarily because of a leap in production and imports prompted by higher pump prices and higher profits this spring, said Adam Sieminski, an energy analyst with Deutschebanc Alex.Brown in Baltimore. At the same time, motorists trimmed gasoline purchases by about 1 percent in May, compared to a year ago.
"All of this $3-a-gallon gasoline talk was a bunch of horsefeathers," Sieminski said. Instead, gasoline production has climbed steadily and inventories have returned to normal seasonal levels for the first time since last summer.
Sieminski and other analysts said the worst fears for this summer have been calmed by improved energy supplies, although nasty surprises could cause prices to head up again.
"Nobody is predicting the nightmare scenarios (for California) that people were seeing last winter," said Platts senior market reporter Mike Wilczek. "But everybody realizes there's still a lot of risk. This market can still scream because there's still a shortage of (power) supply."
"Summer hasn't begun," Beutel cautioned. "The consumer will determine where gasoline prices go in July and August." A fuel-it-up-and-go attitude toward long-distance family vacations could nudge gasoline prices somewhat higher.
The drop in natural gas prices follows cutbacks in gas usage by manufacturers, primarily aluminum, fertilizer and chemical plants.
And the nation remains dependent on a fragile energy transportation and refining infrastructure.
The wild card is Saddam Hussein's decision to cut Iraq's crude oil production by 2 million barrels a day in retaliation for a campaign by Britain, backed by the Bush administration, to clamp down on Iraqi oil exports that violate United Nations sanctions. Analysts are divided over whether the Iraqi cutback will be limited and essentially offset by increased production from Saudi Arabia, or whether it will be extended, halting an expected decline in crude oil and product prices.
On this, Sieminski is among the pessimists. "I think this could be a mess."
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