How the Rising Cost of Fuel Affects Your Co-op

Soaring fuel costs have become an unfortunate reality for our nation. We feel the effects at the gas pump, grocery store and in almost every other aspect of our daily lives. In recent months we’ve seen the price of gasoline make a steady climb, exceeding $3 per gallon at the pump. Other fossil fuels – like natural gas – have also experienced unprecedented cost increases.

As consumers, we all feel the sting of high fuel prices caused by a number of uncontrollable factors. At West Florida Electric Cooperative (WFEC) we share our members’ concern about the implications of high fuel prices over the long term. In response, we continually monitor costs to ensure you get the best value for your dollar.

So, why are fuel costs rising so dramatically?

Several issues influence fuel costs, including world demand, decreased domestic supply and natural disasters – such as hurricanes in the Gulf of Mexico – that disrupt supply. Gasoline, diesel fuel, natural gas, propane and coal all fall subject to many conditions that affect cost. In fact, since 1999, prices for oil and natural gas have risen approximately 400 percent. [Source: FPL]

Gasoline prices are affected by the realities of global supply and demand for crude oil. Costs associated with refining, distribution and delivery also influence the price consumers pay at the pump. Limitations on the nation’s refinery capacity also boost gasoline prices.  Taxes are calculated into the total cost-per-gallon of gasoline as well.

Political instability also plays a major role in gasoline cost. Civil unrest in oil-producing countries can limit the amount of crude oil available to U.S. refineries. On the other hand, a robust U.S. economy means an increased demand for gasoline and other products derived from crude oil. Booming Asian economies, including China and India, provide vigorous competition for crude oil in the global marketplace for U.S. refiners.

Natural gas is a key fuel consumed by electric-generating utilities. But, unlike gasoline, most natural gas used in the United States comes from domestic production – nearly 83 percent [Source: American Petroleum Institute]. In addition to the realities of supply and demand, natural gas markets are also subject to great strain from conflicting government policies that promote its use but restrict its production resources.

In recent years, in certain times and regions of the country, natural gas demand has grown faster than available supplies can be delivered. Such tightening of the market has resulted in dramatic price volatility. Consumption of natural gas is growing at a faster rate than for any other primary source of energy. In fact, natural gas consumption has increased 35 percent in the last decade [Source: U.S. DOE].

A prime factor affecting natural gas cost in the United States is the disruption in supply due to hurricanes in the Gulf of Mexico. Most recently, Hurricane Katrina initially reduced oil supplies by an estimated 1.4 million barrels per day and natural gas supplies by an estimated 8.8 billion cubic feed per day (bcfd), due to shutdowns as well as direct damage. In addition, about 1.9 million barrels per day of crude oil refining capacity was shut down as Katrina approached. Following the storm, a number of other refineries were forced to reduce operating rates because of disruptions to oil supply and product distribution systems and electricity outages.

Fundamentally, WFEC is impacted by high fuel costs much like consumers. As of November 2007, the year-to-date natural gas costs to PowerSouth, formerly Alabama Electric Cooperative (AEC), our wholesale power provider, was $8.96 per MMBtu. Coal costs through November 2007 were $2.44 per MMBtu. Natural gas prices are much more volatile than coal. Fuel cost made up 42 percent of PowerSouth’s budget in 2007 and is estimated to do the same in 2008.

Rising fuel costs remain a concern for electric utilities, yet distribution co-ops sold 373 billion kWh nationally in 2006, up 2.4 percent over sales in 2005.According to the U.S. Department of Labor’s Consumer Price Index (CPI), the national average cost of electricity (500 kilowatt-hours) increased just 5 percent between August 2004 and August 2005. According to the U.S. Department of Energy’s Energy Information Administration (EIA), in the United States, regular grade gasoline prices rose from $1.78 per gallon on January 3 to as high as $3.07 per gallon on September 5 – that’s a 129 percent increase in just nine months.

So, you see, electricity costs to consumers have not risen as rapidly as the cost of other energy sources used by consumers. In fact, the National Rural Electric Cooperative Association estimates that residential electric bills have risen just two percent (after adjustments for inflation are made) per year since 2000.

At WFEC we recognize that our members are directly affected by escalating energy costs. Because you are served by a not-for-profit electric cooperative, you can rest assured that your electric energy is provided at the lowest reasonable cost.   We are committed to providing that low cost even when fuel costs spike.  In the face of rising fuel prices, rest assured that West Florida Electric will take every measure to provide our members the best value for your dollar.