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Virginia’s
energy crunch
Energy sticker shock is hitting Virginia. Prices for
virtually every type of fuel and petroleum-based product
have risen steeply in recent months. The prospect of
war with Iraq is certain to keep pricing volatile, though
it’s too early to gauge the impact on the state’s
economy.
Gasoline
prices have risen steadily from about $1 per gallon
in early 2002 to about $1.60 now. Crude sells for $40
a barrel and could go much higher if a war with Iraq
is especially bloody. Asphalt prices are up and natural
gas prices have risen 7.5 percent in the past two months.
Skittishness
over war is only partly to blame for the price hikes
— the largest in years. A major factor is a three-month-old
strike in the Venezuelan oil fields that provide the
U.S. with much of its crude. They now are producing
only about half of their normal 1.55 million barrels
per day. Reserves are thin because of the lower-than-normal
operating capacity of refineries. The rough winter has
forced U.S. refineries to shift to process more heating
oil, further reducing gasoline supplies, says Michael
O’Connor, president of the Richmond-based Virginia
Petroleum, Convenience and Grocery Association, a trade
group representing 1,600 independent gasoline retailers.
The
increases are hitting businesses by raising transportation
costs. Price hikes are even affecting roofing shingles.
Asphalt shingles are made partly with petroleum and
prices have risen several times largely because of the
labor unrest in Venezuela, says Bill Palsa, president
of Cross Timbers Roofing in Richmond. “It means
that to put a roof on your typical 2,000-square-foot
house, it’s going to cost a couple of hundred dollars
more than a year ago,” he says.
One
reason the overall impact on the state’s economy
has been tempered, however, is because of the atypically
cold winter. Snowstorms kept many vehicles off the highways,
so their operators didn’t pay the higher gasoline
bills. Virginians can take heart that while high, their
per-gallon gas prices are nowhere close to the $2.20
per gallon or more being charged in San Francisco, site
of the country’s most expensive gasoline.
On
the flip side, cold weather is being blamed for natural
gas hikes. Columbia Gas of Virginia hiked its prices
7.51 percent in February because of heavier use of reserves
and increased demand.
One preventive step business executives can take is
paying more attention to managing risks. “When
energy prices start to head up, that’s the time
companies start thinking about risk management,”
says Shirley S. Savage, president of The Thinking Companies
and co-author of “Power Market Risk: How To Survive
(& Prosper) In Crazy Times.” Since energy is
always an important part of business, “it pays
to manage that risk rather than moan about the changes
in the market,” Savage says. For instance, a truck
fleet owner might turn to the futures market to hedge
the price of fuel and to prevent being hit by sudden
market jumps.
The
future is as unsettled as ever. The wild card is Iraq.
If war comes and is quick and decisive, experts predict
that oil prices will gradually slide to a comfortable
$27-a-barrel range. A worst-case scenario would have
Saddam Hussein attacking critically important oil fields
in neighboring states with chemical or biological weapons.
If that happens, prices could zip up to $100 a barrel,
with corresponding economic chaos.
Virginia
Business - April 2003
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