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Energy Prices to Remain 'High and Volatile' through 2008


The price of home heating oil, gasoline, diesel fuel and other petroleum-based products is expect to remain "high and volatile through 2008," according to the latest Short Term Energy Outlook from the Energy Information Administration (EIA) of the U.S. Department of Energy, released earlier this month.

Residential heating oil prices are projected to average $3.23 per gallon this heating season, a 30% increase over last season. EIA projects motor gasoline and diesel prices to average well over $3.00 per gallon through the year, with gasoline prices peaking in the spring at more than $3.40 per gallon.

Larger than average inventories of natural gas have helped to insulate the natural gas market from some of the impact of the recent price increases in petroleum markets, however. As a result, the EIA expects only moderate gains in the price of natural gas through 2008. Average household natural gas expenditures are expected to show an increase of about 7% this heating season compared to last.

Although a number of factors contribute to the upward pressure on petroleum prices, they all sum up to simple supply and demand. Global demand and consumption of oil is growing at a faster rate than supply. Ongoing geopolitical risks and continuing worldwide refining bottlenecks contribute to the situation.

Petroleum production outside of Organization of Petroleum Countries (OPEC) is forecast to increase in 2008 by some 900,000 barrels a day. Gains in the U.S., Brazil, Russia and Canada will offset lower production in countries such as Mexico, the United Kingdom, Norway and Egypt.

However, in early December, OPEC decided to maintain existing production quotas, leaving existing OPEC inventories to meet growing demand. Also, in November, the price of West Texas Intermediate (WTI) crude oil average averaged almost $95 a barrel, up $36 a barrel from the previous year. Through 2008, the average price of WTI is expected to exceed $80.

The EIA projects total global petroleum consumption to rise by 1.4 million gallons per day over 2007, with China alone accounting for one-third of the growth. However increased prices in the a few countries, including the U.S., appear to have dampened demand, EIA notes.

U.S. oil consumption in 2008 is now projected at 21 million barrels a day, an increase of 1.1% over 2007.

U.S. natural gas consumption is also expected to increase 1.1% in 2008. U.S. consumption in 2007 is expected to have grown by 5% by year's end.

U.S. electricity consumption is 2007 is projected to have increased by 1.9% over 2006. EIA assumes that cooling degree days in 2008 will be about 12% lower than in 2007, with a return to near-normal temperatures. This should keep residential electricity sales growth relatively flat at a rate of 0.2%, according to the report. Slow macroeconomic growth in 2008 will also limit growth in electricity sales to the commercial and industrial sectors, EIA notes.

Click here to see the complete report