Supply chain and operation consultancy SGS Maine Pointe takes a deep dive into the causes for higher energy prices
February 2, 2023, Boston, MA – Energy prices will continue to be high in the near term, according to a new forecast released by global supply chain and operations consulting firm, SGS Maine Pointe, a member of the SGS Group. The report, authored by Stephen Ottley, Senior Managing Director and Head of Chemicals & Energy, and Richard Zdunkewicz, the firm’s energy markets analyst and lead energy advisor, cites increasing demand for natural gas export as well as decreased oil and gas capital expenditures as the primary cause for near-term price inflation in all US markets. A mild winter in the U.S. and Europe have held prices at bay, but that relief is likely to be only temporary.
Part 1 of the report, “Storm Clouds Gathering for Energy Prices,” explains how the reshuffling of the global natural gas supply, increased US exports to the EU, and an increased investment in renewables will result in higher energy prices in the US near-term. In part 2, “The US Chemical Industry, Energy Intensity, and Costs,” the authors go into additional detail about energy intensity in the petrochemical industry, and the impact energy prices will have on the industry. According to the report, higher energy costs are already having an adverse effect on chemical company earnings, although strategic management of energy can result in better cost management and lower risk.
The report takes Russian exports of LNG to the EU into account, noting that imports of Russian gas have dramatically decreased since its invasion of Ukraine and are unlikely to resume historical levels for some time. As a result, the EU will rely on LNG from the US and other global suppliers.
The SGS Maine Pointe report also considers renewable energy, noting that near markets favoring renewable power over thermal generation sources show much higher prices along with significant resiliency issues. “To effectively incorporate renewable energy into the mix, we need better grid management technologies and the ability to properly balance resources,” said Zdunkewicz. “We’re just not there yet in terms of energy storage technology.”
According to Ottley and Zdunkewicz, higher costs in renewables-centric markets are due largely to the intermittent nature of renewable energy and lack of adequate power storage, two issues that must be addressed before the market can achieve the resource adequacy goals needed to provide a fully resilient power grid. Ottley adds, “There are higher natural gas prices across the board, but higher electricity costs in California are directly correlated to higher penetration of renewable power generation, and as renewables have grown in the generation mix, prices have risen accordingly.”
The authors further note that a major factor in the supply and therefore the market price for natural gas is the fact that capital expenditures for oil and gas are declining as a percentage of cash flow. Major oil and gas companies are investing about half as much capital as they were when crude was $100 a barrel. Shifting government policies, along with shareholder activism oriented towards renewables, have also caused oil and gas companies to be more reluctant to invest capital in traditional hydrocarbon development.
About SGS Maine Pointe
SGS Maine Pointe, a member of the SGS Group, is a global supply chain and operations consulting firm trusted by chief executives and private equity firms to drive compelling economic returns for their companies. We achieve this by delivering accelerated, sustainable improvements in EBITDA, cash, and growth across their operations, procurement, and logistics. Our hands-on implementation experts work with executives and their teams to rapidly break through functional silos and transform the plan-buy-make-move supply chain to deliver the greatest value to customers and investors at the lowest cost and risk to business.
SGS Maine Pointe’s engagements are results-driven and deliver between 4:1-8:1 ROI. We are so confident in our work and our processes that we provide a unique 100% guarantee of engagement fees based on annualized savings. www.mainepointe.com
About SGS
We are SGS – the world’s leading testing, inspection, and certification company. We are recognized as the global benchmark for quality and integrity. Our 96,000 employees operate a network of 2,600 offices and laboratories, working together to enable a better, safer, and more interconnected world. SGS has been delivering ESG and sustainability solutions and services to clients for the past 25 years and has been a carbon neutral company for the past seven years.