The Missouri Public Service Commission has directed Kansas City Power & Light Co. to offer stand-by electric services to self-generation customers at market-based prices.
natural gas prices were at a cyclical low level, similar to historic lows that occurred in 1861, 1892, 1914, 1931, 1945, and 1972. From these lows, prices have dramatically increased. So why are constant dollar prices projected by most forecasters to be anywhere from nearly level to declining for the next 20 years? For many, the long-term view of the future is heavily influenced by the short-term past-generally, what has transpired during the past year. Until January 2002, energy prices were in decline from their highs of the fall and winter of 2000. 4
Energy Producers' Response to Long-Term Price Trends
During the downward trend in energy prices between 1981 and 1998 of the last energy price cycle, the productivity of labor and capital improved at crude oil, natural gas, and coal producing facilities. Technological innovations that were relatively expensive during the boom years, between 1972 and 1981, became readily available and more reasonably priced. Additionally, energy producers were more motivated in employing these cost reduction technologies as a way to remain competitive in a marketplace characterized by excess production capacity and declining real prices. Fierce competition and the need to reduce unit costs, by maximizing the level of production for a given amount of invested capital, also aggravated oversupply and forced prices lower.
Near the bottom of an energy price cycle, only the variable or cash costs of production are covered. There is little incentive for the producer to invest additional capital to purchase marginally better technology to improve the productivity of existing operations. Rather, the less competitive fuel producers and suppliers of energy producing equipment and services either voluntarily or involuntarily (via bankruptcy) leave the marketplace. Others seek out merger partners or consolidate production activities to further reduce their administrative and operating cost structure. This was the trend from the mid-1980s through 1999, and is once again taking place in 2002.
To overcome the normal production decline at crude oil and natural gas wells, a considerable number of new wells must be completed each year to maintain production. This level of drilling activity does not accommodate the normal increase in demand and the additional demand spurred by lower prices.
At the price cycle lows, the marginal producers are attempting to avoid bankruptcy and make large reductions in their expenditures for drilling. This occurred in the fall of 1998 and continued through 1999. At such junctures, the media often contributes to an "environment of despair." Energy producers read articles such as "Drowning in Oil," which appeared in the March 6, 1999 issue of , 5 and feared that they were true. That article argued the case for oil prices remaining low. How low? Five dollars per barrel.
Once excess production capacity has been depleted at the price cycle low, additional supply to satisfy a given level of demand can only come from the development of new sources of supply. During the period of increasing energy prices at the start of a new price cycle, suppliers of goods and services throughout the energy supply chain begin marking up their prices. In addition,