Energy prices to remain elevated in near term, says SGS Maine Pointe

Energy prices are expected to remain elevated in the near term, according to a new forecast from SGS Maine Pointe, a global supply chain and operations consulting firm.

The report, co-authored by energy sector experts Stephen Ottley and Richard Zdunkewicz, says the primary drivers of near-term price inflation in US markets are increasing demand for natural gas export and decreased oil and gas capital expenditures.

Though a mild winter has held prices at bay in the US and EU, that relief is likely to be temporary.

Part 1 of the report, “Storm Clouds Gathering for Energy Prices,” explains how the reshuffling of the global natural gas supply (i.e. Europe’s weaning off Russian gas), increased US exports to the EU, and increased investment in renewables is driving higher energy prices in the US near-term. In part 2, “The US Chemical Industry, Energy Intensity, and Costs,” the SGS Maine Pointe experts examine the impact of elevated energy prices on the petrochemical industry. According to the report, higher energy costs are already depressing chemical company earnings.
Ottley and Zdunkewicz note that EU imports of Russian gas have dramatically decreased since Russia’s invasion of Ukraine, and are unlikely to resume historical levels for the foreseeable future. The EU will rely on liquid natural gas from the US and other global suppliers in the meantime.

The report also found that markets favoring renewable power over thermal generation – such as California – are showing much higher prices as well as resiliency issues. The authors say higher costs in renewable-centric markets are largely due to the intermittent nature of renewables and a lack of adequate power storage.

“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.”

Another factor keeping energy prices elevated is declining capital expenditures for oil and gas as a percentage of cash flow. Energy firms are investing approximately half as much capital as when crude was $100 a barrel. Shifting government policies and shareholder focus on ESG are further dissuading energy firms from investing in hydrocarbon development.

In the short term, Deloitte’s energy practice is projecting an average West Texas Intermediate price of $80.00 per barrel in 2023, down from an average of $94.41 in 2022.