Rising Energy Prices

Econ 301

23 March 2022

Rising Energy Prices

The Guardian published the article, “What is causing US utility bills to rise and will it persist in the warmer months?” on March 13, 2022, by Aliya Uteuova and Andrew Witherspoon. Americans rely on fuel oil, propane, kerosene and firewood, piped gas, and electricity for their energy needs. Several factors have affected energy’s change in price over the last couple years. Immediately following the Covid-19 pandemic, lower demand created a surplus of oil supply and caused plummeting oil prices. However, in 2021, the price of all energy sources, besides electricity, began to surge above the price of all goods and services. Recovery from the pandemic, climate-related events, such as the 2021 February Texas freeze and Hurricane Ida, and the invasion of Ukraine are all contributing to the increase in energy prices.

As the U.S. recovers from the pandemic, demand for goods, including energy, has increased. An overwhelming positive shift in demand has increased prices and congested the supply chain.  The Great Resignation put additional pressure on the supply side of the market. Reduced supply has compounded the effects of heighted demand and contributed to the current increased prices.

The climate crisis has also created negative supply shocks causing further energy price increases. The February Texas freeze last year caused the state’s power-grid to fail. Much of Texas relies on natural gas for its energy production. In the freezing conditions natural gas production slowed and the power plants could no longer function. (Cai et al). Millions of homes and businesses were left without power for days.

Now with the war in Ukraine disrupting world energy markets, elevated prices are expected to be sustained through the winter months and for the rest of the year. Although only 8% of U.S. oil imports come from Russia, the volatility of the market still provides an opportunity for producers and distributors to raise prices (Ryssdal).

The price of fuel oil has risen the most, by 40% since January 2019. The increased prices have impacted states in the Northeast the most, where fuel oil is still a major source of home heating. In New York, nearly 1.3 million households are at least two months behind on utility bills. In New York City, energy inefficient housing is prevalent among communities of color and low-income, causing many of these households to spend a disproportionate amount of their income on heating, cooling, and powering their home. Compared to New York’s energy burden goal of 6% for low-income households, “one in four New Yorkers have an energy burden over 17%” (Uteuova and Witherspoon).

Households in other parts of the country are also spending more on their energy bills. Since January 2019, piped gas prices have risen in the South, West, and Midwest by 24%, 32%, and 34% respectively. Whereas the rate of increase in prices of electricity is about the same as the price increases of all goods and services. The West is the exception with the rate of electricity prices rising by 20%. 

Energy sources are relatively inelastic goods, people will continue to buy it even if the price increases, so producers and distributors are not incentivized to keep prices low, especially during times of economic upheaval. Utility companies, including Con Edison which services New York City, are often regulated to prevent rapid price increases. Con Edison is currently seeking permission from the state to raise their prices. If permitted, Con Edison is projected to accrue roughly $1.7 billion in additional revenue. Their actions illustrate their true intent, unlike the ambiguous statement from a Con Edison representative released to the Guardian: “We are reviewing all of our practices that affect customer supply costs, including our energy-buying practices” (Uteuova and Witherspoon). Consumers need to have better control over the energy they buy and use. Transitioning to a decentralized renewable energy system would likely mitigate supply shocks and heightened price expectations and, thereby, price surges. Adding solar to the roofs of more households is a good example of a consumer-controlled, decentralized renewable energy system. If their buildings are equipped with sufficient battery storage, there would be no need to rely on the grid and be affected by the prices they set. The negative externalities, such as pollution and health complications, from the current fossil fuel run energy market would also be reduced.

 

 

Works Cited

Cai, Mandi, et al. “How Texas' power grid failed in 2021 — and who's responsible for preventing a repeat.” The Texas Tribune, 15 February 2022, https://www.texastribune.org/2022/02/15/texas-power-grid-winter-storm-2021/. Accessed 22 March 2022.

Ryssdal, Kai. “An oil shock? In this economy?” Marketplace.org, 8 March 2022, https://www.marketplace.org/shows/marketplace/an-oil-shock-in-this-economy/. Accessed 22 March 2022.

Uteuova, Aliya, and Andrew Witherspoon. “What is causing US utility bills to rise and will it persist in warmer months?” The Guardian, 13 March 2022, https://www.theguardian.com/us-news/2022/mar/13/us-utility-bills-energy-prices-increase. Accessed 22 March 2022.