Gas demand heats up commodity market

By Melanie Franner

Energy is in constant demand – be it air conditioning in the summer or heating in the winter. Add to that the regular need for electricity for cooking, lighting, or even water delivery, and the demand continues to rise. The correlation between energy demand and commodity prices may be nothing new, but the downturn in the oil and gas industry has made the link that much more apparent.

Climate change

Global warming is doing its part to highlight the correlation between energy demand and oil and gas prices. Over the last half of the 20th century alone, according to the Government of Canada, global warming was about twice that for the entire century. And, it adds, global warming experienced since the mid-20th century can be attributed largely to human influences. The government cites a long-term global warming of about 0.85° C between 1880 to 2012.

The U.S. Environmental Protection Agency (EPA) has said that since 1901, the average surface temperature across the contiguous 48 states has risen at an average rate of 0.13° F per decade. Since the late 1970s, however, average temperatures have risen more quickly – 0.26 to 0.43° F per decade. Worldwide, adds the EPA, 2014 was the warmest year on record.

Climate change can impact the environment in a variety of ways, such as increase or decrease rainfall, affect crop yields, affect human health, change ecosystems, and even impact energy supplies. Scientists have advised that temperature increases be limited to 2° C above pre-industrial levels, and that in order to do so, net carbon dioxide emissions need to decrease to almost zero by 2050.

On December 12, 2015, Canada was one of 194 countries to sign the Paris Agreement, an effort to fight climate change and limit global average temperature rises to well below 2° C – and to pursue efforts to limit the increase to 1.5° C.

The Paris Agreement is an ambitious effort, given the fact that even the slightest rise in temperature can produce dramatic results.

According to the EPA, if the U.S.’s climate were to warm up by 1.8° F, the demand for energy used for cooling would increase by about five to 20 per cent, while the demand for energy used for heating would decrease by about three to 15 per cent. Warming is likely to increase summer peak electricity demand in most regions of the U.S. The EPA suggests that a 6.3 to 9° F temperature increase could result in climate change that would require the need for additional electric generating capacity of approximately 10 to 20 percent by 2050.

Another area that would be greatly impacted by climate change is water. Not only is energy needed to pump, transport and treat drinking water and wastewater, but rising temperatures can affect the amount of water available. Warmer temperatures increase the rate of evaporation.

The EPA states that the Colorado River system, for example, is a major source of water supply for more than 30 million people. Recent droughts, reductions in winter precipitation and drier springs have caused water supplies in the river to decrease. According to the EPA, every one percent decrease in streamflow in the Colorado River Basin results in a three per cent decrease in hydroelectric power generation in the region.

Climate change and commodities

All of these potential increases in temperature and decreases in water supplies will undoubtedly help shape the future oil and gas markets. Already, some analysts have witnessed the correlation between the higher temperatures experienced as of late and the increased demand for energy. The International Energy Agency released a report in November 2015 entitled Making the Energy Sector More Resilient to Climate Change. In this report, it cites extreme weather events as having been a cause of oil and gas production disruptions.

For example, the report states that the May 2015 wildfires near the oil sands production areas in Alberta reduced total oil output by around 10 percent, at the time its lowest level in almost two years. The report also refers to Hurricanes Katrina and Rita as damaging more than 100 oil-drilling platforms in the Gulf of Mexico in 2005.

The numbers have it

According to Global Affairs Canada’s monthly April 2016 report on Canada’s International Merchandise Trade Performance, energy exports jumped 7.6 per cent in April of this year, with natural gas exports accounting for most of the gain. Exports of natural gas leapt 43.2 per cent for the month, which was attributed largely to a spike in prices linked to below-average seasonal temperatures in the northeastern U.S. at the beginning of April.

The U.S. Energy Information Administration states that 97 per cent of natural gas imports arrive via pipeline from Canada. The numbers show a steady decline in almost every year since 2007, with 2015 being the lowest level since 1994.

That being said, warmer weather translates into greater energy demand and – ultimately – higher pricing for oil and gas. As such, the ongoing fluctuation in energy demand will undoubtedly continue to impact the price of oil and gas – both domestically and internationally. And although the effects of climate change and global warming remain unknown, one can easily assume that more dramatic weather conditions will persist well into future.

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