Time to lock in energy prices?

As electricity and natural gas costs start to rise, you can hedge your risk

Matthew Simmons, Texas author and investment banker and the guy who bet oil will hit $200 a barrel next year, feels pretty good.

Oil has doubled to $70 recently as the economy shows signs of life, and "prices do seem poised for the next leg up," he says on the phone. "By sometime a year or two from now, we'll look back and say, yeah, prices were really cheap."

Perhaps the leading proponent of the idea that oil is running out, Simmons probably won't win his bet, made with New York Times columnist John Tierney. But the prospect for further increases raises the question of whether you should buy future energy at today's prices, to the extent that you can.

I've already recommended buying two years of electricity from Washington Gas Energy Services at 10.8 cents per kilowatt hour (888-884-9437).

That's moderately less than the standard Baltimore Gas and Electric price over the next 12 months, which has already been set. (BGE's average price will be 11.93 cents for the period, meaning a typical family will save $10 or $15 a month by switching to WGES. Delivery is extra for both products.) I'm betting it will be less than or at least equal to standard BGE prices in 2010-2011, too.

It's also time to consider protecting yourself against higher costs for natural gas and heating oil. A two-year natural-gas deal from WGES is worth considering if you're optimistic the economy will resume growing and increase demand for energy. And if you heat with oil, it might not be a bad idea to fill your tank now instead of waiting until October and also to consider buying price protection for the winter.

Thanks to last year's financial crisis, energy prices crashed along with those of just about every other asset. Crude oil went from $145 a barrel in July to $32 in December. BGE's default natural gas price plunged from $1.58 per therm last summer to 53 cents per therm in March. Heating oil for sale to Maryland residences went from as much as $4.60 a gallon down to the $2 range.

But with the economy apparently on the mend, energy costs may have reached bottom.

Because factories and electric plants are burning much less natural gas than they were a year ago, "supply greatly exceeds demand," says Bert Wilson, a principal at South River Consulting, a Baltimore-based energy adviser. But, he adds, "the market has moved too darned far. The seeds of inflation are there. When demand starts to rise, it's going to outstrip supply and you're going to get a big spike."

The question, of course, is when that will happen. I'm skeptical of predictions of a roaring economic comeback. But even formerly pessimistic seers are suggesting the economy could begin growing again this summer.

Natural gas inventories (the stuff extracted, pumped into pipes and waiting to be burned) are at five-year highs. That should keep prices relatively low at least into next winter, barring another bad hurricane that disrupts drilling and transportation. But some pros believe prices will still move up from today's 50-cent territory.

"We believe the winter number is going to be in the 85- to 95-cent range in February of 2010," says Richard Anderson, managing principal for Columbia-based CQI Associates, which is selling household energy plans through local chambers of commerce.

At the instigation of the Public Service Commission, which believes utilities should partly pass today's low prices to consumers who burn gas this winter, BGE is buying more gas in the spring and summer this year than it usually does. That would partly shield users if the market heads back up. Even so, prices billed to households will probably go up, BGE says.

"Based on what we're seeing so far, we would expect this winter's gas to probably be a little lower than last winter, but it's going to be higher than what we see right now," said Ronald T. Jennings, BGE's director of gas supply.

Is that reason enough to lock up your own supply, separate from what BGE will offer? (BGE is always your electric and gas delivery company, but suppliers can vary.) The best natural gas deal out there is from WGES (see phone number above), letting you buy for a year at 73 cents and two years at 84 cents.

While substantially higher than today's price, those deals - especially the two-year package - will look good if the economy recovers in a robust way. If prices of $1.20 or $1.50 per therm would make a distressing dent in your budget, the two-year WGES deal is the way to go.

For heating oil, one decision is easy. Fill up now, if you have the cash. Most tanks hold 275 gallons or so - about a third of a winter's supply in Maryland - so you'll be partly protected if prices go back over $3. You might also investigate price caps and other "hedging" that area dealers offer.

For example: You can pay Carroll Independent Fuel (800-834-8590) 20 cents a gallon to ensure next winter's oil supply won't cost more than $2.59 a gallon. So you could reserve 500 gallons at 20 cents each, or $100, and if the market price goes up to $4 you come out ahead.

(Be careful with companies that offer "free" price caps. Some charge you hundreds of dollars if you want to get out of the deal later.)

For consumers, timing the market generally doesn't work any better for energy than it does for stocks.

But with prices down so far from last year's highs and the economy apparently recovering from its coma, this might be the time to make an exception.