Oil and Gas Prices

Increases in crude oil and natural gas prices have generated some substitution to other energy sources — like coal or electricity — but not all consumers can easily or efficiently switch. Coal and electricity prices have also increased over the last three years, influenced by the interdependence among energy sources. For example, as an increasing amount of electricity supply is generated from natural gas fired plants, electricity prices will be influenced by natural gas price swings and natural gas prices will be increasingly sensitive to electricity demand.

The impacts of Hurricanes Katrina and Rita included massive disruptions of natural gas and oil production, refining and distribution and expectations are Gulf of Mexico production will not be completely restored prior to the start of the 2006 hurricane season (June 2006). As a result, oil and natural gas prices are expected to remain high and volatile in the short term. The natural gas price forecast in Budget 2006 was prepared in early January incorporating a lower short-term price outlook due to unusual mild winter weather throughout North America.

The Ministry of Energy, Mines and Petroleum Resources uses private and public organizations as well as internal analysis to forecast natural gas prices. BC’s royalty price forecast is based on averages of private sector forecasts, adjusted for conversions:

  • from market hub to Canadian dollars per gigajoule at plant inlet; and
  • from calendar year basis to fiscal year basis.

The ministry’s forecast is in line with these averages.

Chart: Natural gas price outlook.

Revenue from energy and mineral sources is forecast to decline from $3.4 billion in 2006/07 to $2.8 billion by 2008/09 as the forecast assumes tight supply and strong demand eases slightly resulting in lower prices by the end of the forecast period. BC royalty revenues are very sensitive to natural gas prices and the higher forecast allowance in 2006/07 reflects increased risks arising from price volatility. A price change of C$1.00 per gigajoule results in about $300 million revenue change.

Table: Natural Gas Price Forecasts.

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