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    Inflation is easing, but electricity prices continue to rise. Here’s why


    August 11, 2022 - David Lightman, Hanh Truong, The Sacramento Bee

     

      Finally, energy prices are falling, and falling fast. But don’t be fooled.

      Prices remain a lot higher than they were months ago, they’re generally not going to reach 2021 levels anytime soon — and the price of electricity continues to climb.

      The federal Bureau of Labor Statistics’ report on inflation Wednesday was a good news/bad news mix.

      Good news: Energy prices nationally tumbled 4.6% last month. Gasoline dropped 7.7%, and a gallon of regular in California Wednesday was more than $1 a gallon less than the mid-June peak price..

      Supply and demand for most energy products are edging back to a point where they’re heading for balance. A variety of factors, including sudden demand and supply crunches exacerbated by Russia’s invasion of Ukraine helped push prices up.

      “As the supply chain comes back into sync, demand cools off and you see energy prices cool down,” said Sanjay Varshney, professor of finance at California State University, Sacramento.

      But there’s also sobering energy news. Electricity prices nationally were up 1.6%, the third straight month they jumped more than 1%. They rose 15.2% over the last 12 months, the biggest annual spike in 16 years. Natural gas prices fell last month but have gone up 30.2% over the year.

      PG&E spokesperson Katie Allen said that customers should expect their electric bill to be about 20% more this summer compared to last summer. This is due to increased energy supply prices, Allen said. PG&E is California’s primary electric provider.

      “PG&E does not add any mark up on the energy we buy for our customers’ use, neither gas nor electric,” she said in an email to The Bee. “What we pay, you pay.”

      Allen said the company is focusing on keeping prices from increasing with methods such as keeping operating costs low, using a gas storage to keep natural gas for later use and having diverse electricity generation resources.

      If you have a local provider like Sacramento Municipal Utility District, or SMUD, you might be shielded from the increase — for now.

      Alcides Hernandez, revenue strategy manager at SMUD, said that the district’s board approves rates for two year increments.

      Last year, the board approved rate increases of 1.5% effective March 1, 2022, and a 2% rate increase effective Jan. 1, 2023, for residential and non-residential customers. According to the fact sheet, the increases are below the forecast rate of inflation.

      There are still risks that inflation will re-ignite, or at least won’t cool as much as hoped.

      “The flow of energy from Russia to Europe will be reduced significantly. The slowing economic growth here and abroad will soften demand somewhat but not enough to cut the price of energy significantly on a continuing basis,” said Sung Won Sohn, president of SS Economics in Los Angeles.

      As a result, he said, he expects “the energy price including oil to decline from its recent highs but not back to where we were in 2021.”

      Energy prices overall still are not near last year’s levels. Though energy prices and gasoline prices overall fell last month, the drops did not make up entirely for the increases of the previous month. In June, energy was up 7.5% and gasoline, 11.2%. And energy prices overall remain up 32.4% over the year.

      Most analysts agree that energy prices have probably peaked, or at least are not destined for the sort of steep increases of the last few months.

      Increased oil production, lower demand and other factors have helped bring down gasoline prices. Oil has been trading around $90 a barrel recently, well below the nearly $120 of a few weeks ago. The average price of a gallon of gasoline in California Wednesday was $5.39, well below the $6.43 peak on June 14.

      “The most likely scenario is the pandemic recedes, the supply disruptions begin to (fade), the worst of the energy price hikes are behind us,” said Mark Zandi, chief economist at Moody’s Analytics.

      There are risks to all this, he and others said.

      Suppose the European Union imposes tougher sanctions on Russia? What if a hurricane seriously disrupts the energy supply chain? Will the pandemic return in full force?

      At the moment, though, expectations for inflation have cooled somewhat. But remember, said Sohn, “energy prices are notoriously volatile.”

      ©2022 The Sacramento Bee. Visit sacbee.com. Distributed by Tribune Content Agency, LLC.

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