It has been a whiplash-inducing couple of months for the men and women who manage energy costs at their respective organizations.
On July 11, the price of crude oil hit $147 on the New York Mercantile Exchange, and analysts predicted the price could reach $200.
By last week, however, the price had dropped by nearly 65 percent and was hovering around $50 per barrel. Gasoline and fuel oil costs have plummeted, as well. Meanwhile, the chief of China’s state-owned oil company recently predicted the price will fall further, to about $40.
The price of natural gas is falling, too, amid an unexpected boom in domestic drilling this year that the chairman of the Chesapeake Energy Corp., a top natural gas producer, has compared to “divine intervention.”
The R.I. Public Utilities Commission last week approved a rate change requested by National Grid, which supplies much of the state’s natural gas, that should reduce ratepayers’ bills by more than 3 percent.
The extreme price fluctuations, which have been attributed in part to the global economic downturn, led the federal government to make major changes to its price forecasts earlier this month.
In September, the Energy Information Administration had predicted the average price of oil in 2009 would be $126 per barrel; this month, the agency halved its prediction for next year’s price to $63.50. Similarly, the agency reduced its price prediction for natural gas in 2009 from $8.55 per thousand cubic feet to $6.82. The agency does still expect electricity prices to increase next year.
John Farley, executive director of The Energy Council of Rhode Island, which represents large commercial and industrial energy customers in the state, said the rapid changes in price are stressful for the people who manage and budget for energy costs at their organizations, but in some ways they are growing used to it.
“It’s been like this for a while,” he said. “You can’t really say people plan for it; you just have different strategies to try to deal with the volatility you face.”
“Right now, prices seem pretty good,” he added. “People are always looking at when it’s going to come up again, but they’re happy right now.”
Farley said most of his members use one of three major strategies for energy purchasing. Some sign fixed-price contracts early in the year in order to finalize their budgets, while others just ride out prices changes and deal with them as they come.
Brown University, which spends about $20 million on energy each year, uses the type of dynamic planning Farley described. During the last fiscal year, the school managed to avoid all the gyrations in energy prices by locking in prices early. This year, however, the school locked in higher prices by fixing them last June.
“It works sometimes, but it doesn’t work all of the time,” said Chris Brown, the university’s director of sustainable energy and environmental initiative. But he said he does not regret paying an above-market cost, because the school still benefited by being able to plan.
“There are times when you may feel a lost opportunity for [lower] pricing, but things could go either way,” he said. “No one has a crystal ball. No one predicted this fiscal debacle. But at the end of the day, I know the budget is balanced and I have the tools at my disposal to do that.”
The school also uses a reverse-auction process to have energy companies bid on its contracts, and buys futures contracts to hedge prices.
Brown said the efforts to lock in low prices goes hand in hand with the school’s broader drive to reduce its greenhouse gas emissions, which the university says it reduced by 7.7 percent last year. “That’s a risk management strategy in and of itself,” he said.
Brown says he is focusing on energy savings large and small. The university replaced all 1,400 steam traps on campus last summer, which has brought significant savings. Students have been deputized as “eco representatives,” getting others in their dormitories to switch to more fuel-efficient light bulbs, for example.
Brown sees many more opportunities for energy savings. “It’s just the time and money,” he said. “It’s the people. It’s having the organization capacity to get out there and find these things. There’s plenty of low-hanging fruit, but it takes resources you have to have, and that’s manpower. At the end of the day, that’s the challenge.”
The manufacturing company Cranston Print Works Co. invested in more energy efficient boilers at its factory in Webster, Mass. earlier this year, the cost of which was partly offset by rebates from National Grid.
Fred Rockefeller, the company’s vice president of finances and administration, said he did not regret the investment despite the fact that prices have fallen because boosting efficiency made sense in any case. “We’d still do it today,” he said, adding: “We’re never going to complain about low prices.” •
