The question has been raised many times lately about how the economy especially the latest news about raising the debt ceiling can have on energy prices. This blog will attempt to answer that question as it relates to natural gas and electricity pricing.

Since natural gas prices affect the price of electricity let’s start there. The largest pricing component of natural gas is set by market forces which is the buying and selling of the commodity by market players, based on supply and demand. There are two distinct markets for natural gas: the spot market, and the futures market. The spot market is the daily market, where natural gas is bought and sold ‘today’. Whereas the futures market consists of buying and selling natural gas under contract at least one month, and up to 36 months, in advance. These natural gas futures are traded on the New York Mercantile Exchange (NYMEX). Futures contracts are but one of an increasing number of derivatives contracts used in commodities markets, and can be quite complex and difficult to understand. However in the simplest terms – it’s all about Supply and Demand so let’s focus on those factors:

SUPPLY - Factors on the supply side that may affect prices include variations in natural gas production, net imports, or storage levels. Increases in supply tend to pull prices down, while decreases in supply tend to push prices up. The economy, debt ceiling talks and balanced budget may affect how much energy company’s drill or explore for new resources, however it really doesn’t have a major effect on supply.

DEMAND - Factors on the demand side include economic growth, winter and summer weather, and oil prices. Higher demand tends to lead to higher prices, while lower demand can lead to lower prices. Therefore when the economy is down our manufacturers tend to use less energy and lower demand. However determining the supply demand of consumers can become very difficult to forecast.

As for electricity, prices are set by the utility or third party supplier (in deregulated states)  Since the majority of electricity in the United States is being produced by natural gas fired generation plants the cost of natural gas becomes the major supply component and the key driver to electricity prices.  So in reality the same factors in natural gas will affect the price of electricity.  A companies advantage in deregulated markets is competitive pricing based on cost structures.  Therefore shopping for the best rates, terms and fees are in your best interest.

So after all that - the answer to this question is that the economy can "kind of" drive energy prices. A slow economy will drive prices down because of the decrease in demand, however it could also make prices go up based on fewer injections into storage by reducing supply.