Fri, July 18, 2008
Boston Energy (Price) Surge Continues
Yesterday the Labor Department released updated regional figures for inflation from June 2007 to June 2008. Nationally, the CPI-U, which measures inflation for all urban consumers, was up 5%.
The major driver of inflation over the period has been the cost of energy, of course. Boston-area household energy prices rose almost 31%, versus the US city average of 13.7%. The cost of natural gas seems to have been a major driver for energy costs; electricity generation in the region is heavily dependent on natural gas, and the region has long had high natural gas prices. If you’re interested, here is a 2005 report on New England’s natural gas needs from the New England Governors’ Council; it suggests that the region’s natural gas infrastructure will be reach the limits of its capacity by 2010. This is bad news; it suggests that we’ll continue to have some of the most expensive natural gas prices in the nation for a while to come.
Somewhat surprisingly (if you’ve been in a grocery store lately), the Department of Labor reported that prices for food eaten at home increased 6.1% nationally but only 3% in the Boston-Brockton-Nashua statistical area. It makes me wonder where they’ve been shopping.
The DOL also reported this week that wholesale prices are up 9.2% for the year ended this June; this is the largest one-year increase since 1981, when energy prices were also a major factor.
Recently, of course, oil prices have stopped their relentless rise and some prodigious price drops have taken place. U.S. gasoline consumption has also dropped about 5% as Americans begin looking for ways to cut transportation costs. The Airline Transportation Association reports that US carriers are responding to the rise in jet fuel prices by cutting back on almost 9% of their seating capacity. Still, there is confusion in the markets as non-domestic sources of demand (especially China and India) seem to be growing.
I do think that oil prices, which remain well above $120/barrel even after declining from a futures price peak of $145.18, will continue to spur consumption reduction until an equilibrium is reached, and even China and India will be constrained by these prices. The “Heard in Asia” column in today’s Wall Street Journal explains that oil consumption in China is now being restrained by the fact that manufacturers just can’t afford the prices. Electricity is being rationed in half the provinces as Chinese electrical demand exceeds current capacity, and the increase in oil prices has precipitated spikes in the prices of other energy-generating commodities, like coal. Barron’s is predicting a decline to $100/barrel by yearend - not cheap, by any means.
It would be nice to see some relief in energy prices soon, but I also hope that the oil and gas prices will spur greater national efforts at consumption reduction. A national shift toward better stewardship of our resources would be a positive outcome from what so far has felt pretty negative.