Energy: The Winter Of Our Discomfort?

Natural gas and oil prices will be lower this winter.

The venerable Old Farmers Almanac -- it's been around since 1792 -- predicts a colder-than-normal winter this year from Boston to Washington, D.C., and heavier-than-normal snowfall in the Midwest, the Plains and the Rockies.

But for many U.S. manufacturers, this winter could be several degrees more comfortable than recent winters have been.

Working inventories of natural gas, for example, are likely to start the coming heating season at their highest levels since 1990, says the U.S. Energy Department. What's more, spot prices for natural gas, which averaged $13.44 per million cubic feet last December, could run roughly $3 less this winter, estimates the Energy Department's Energy Information Administration.

"This has got to be a lot better news for industries that depend on natural gas," says Rayola Dougher, manager of energy market issues at the American Petroleum Institute in Washington, D.C. Paper, glass and steel are among the industries that use natural gas in their production processes, while the chemical, plastics and fertilizer industries use natural gas as a primary feedstock.

"For oil, things are looking pretty good," says Donald A. Norman, an economist who tracks energy issues for Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group. The growth of consumption is slowing as demand dips in reaction to higher prices and as growth of the world economy begins to slow, he explains. "While I recognize there is an upside risk because of the lack of spare capacity in the world oil market, there's a potential for oil prices to drop below their current level as a commodity," Norman states. "Once people make up their minds that the sky is not going to fall, you remove a lot of that risk premium from the price."

Despite such encouraging energy supply and price prospects, manufacturing executives continue to have their concerns. For example, 65% of senior executives of large U.S. companies recently surveyed by PricewaterhouseCoopers view higher energy prices as a barrier to their companies' growth.

"Over the past year, energy prices have risen 23% due to increased global demand, limited domestic supplies, natural disasters and global instability," John Engler, president and CEO of the National Association of Manufacturers (NAM), said in a Labor Day report on the U.S. economy, noting that rising energy prices had cost workers half a percentage point in inflation-adjusted wages. The Washington, D.C.-based NAM renewed its call for U.S. energy policy reform. "The time has come to build a national energy policy to address these costs by increasing domestic production and supply," Engler said.

Later in September, however, as members of Congress prepared to head home to campaign for the November elections, energy legislation wasn't on the front burner. And even if it had been, oil from new offshore reserves would be years, not months, away.

So, in the short-term manufacturing's degree of comfort will be determined by the severity of the coming winter both in the U.S. and Europe, the strength of the rest of the 2006 Atlantic hurricane season and the seriousness of any Middle East supply disruptions.

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