PREDATORY pricing laws are designed to keep one retailer from selling at a loss in order to drive competitors out of business, then raising prices in a new monopolistic environment.
Monopolies aren't good for consumers in any arena. Energy supply is no exception. What's happening in power generation is a concern because one major source of power is being pushed aside. Coal is in disfavor for environmental reasons, but pricing also plays a key role. In this case, it's not predatory pricing but simply market pricing: Natural gas is now a cheap source of power for making electricity.
While coal is plentiful and the supply doesn't have to be imported from hostile regions, coal producers are hard-pressed to compete with gas on price alone. The reason is the shale gas boom triggered by hydraulic fracturing and horizontal drilling. This has upped the supply of gas; the price has fallen dramatically as a result.
Ten years ago, according to a Wall Street Journal report, natural gas was the fuel used to make just 18 percent of electricity. In the 12 months ended last Sept. 30, gas made nearly 30 percent of power. Coal's share declined from 50 percent to 37 percent during that period.
The rub on gas for many years was its price volatility. Power producers could lock in prices for coal for multiple years; the only unknown was how much it would cost to bring the coal from the mines to the power plants. Not so for gas. And not so long ago, gas was a more expensive way to make power than coal.
It could be again. The market now favors gas. Utility companies are under intense pressure to avoid building new coal-fired power plants and shut down existing ones. This has nothing to do with market forces and everything to do with the Obama administration's aversion to fossil fuels in general and coal in particular.
So, gas is growing in importance as a key fuel for making power. Will the prices grow as fast as the demand? If they do, it would be good for Oklahoma's economy and for state revenues. Depressed gas prices have led state-based energy firms to switch their emphasis from gas to oil; meantime, the state's take from gross production taxes has plummeted, falling 85 percent in December from the comparable month of 2011. Market forces aren't the only reason for this plunge, but they do play a role.
If an increased emphasis on gas to make power is good for the state, Oklahomans should be thrilled by recent trends, right? Yes and no. Over time, gas prices will rise; increased demand (to make power and to fuel vehicles) will translate into higher severance tax revenues. At the same time, consumers could find that moving away from coal means sharply higher electricity rates.
Oklahoma is one of only three states that encourage utilities to buy gas on long-term contracts. Oregon and Colorado are the other two. The danger is that any future surge in gas prices will be blamed on the utilities and the politicians who set energy policy. Indeed, Obama will have to answer for a policy that could see relatively cheap coal left in the ground (or shipped to China) while gas prices rise rapidly. In truth, though, he will likely be out of office before this scenario takes full flower.
The utility company presidents who are still in office have a difficult time deciding how to plan for future power demand. As much as we encourage new markets for Oklahoma-produced gas, we believe that power generation should not be over-reliant on one source of fuel and coal should not be left in the ground.