EnergyBiz - November/December 2007 - (Page 16)

» FInAnCIAL FRont energy Trade Status report iMMAturE but growing by pEtEr C. FuSAro eNerGy CommodIty tradING CoNtinues to attract risk capital wanting exposure to the energy complex and portfolio diversification. Today, we are in the fourth year of higher sustained energy prices with oil hitting all time highs of over $90 per barrel in October 2007. We have entered a new realm of energy trading with higher highs imminent as the world continues to gobble up fossil fuels. This continuous trend and high price volatility has brought more hedge funds into energy commodity trading. Today, our Energy Hedge Fund Center tracks over 200 energy commodity trading hedge funds. Despite the high profile blow-ups of Amaranth and Motherrock, we continue to see new energy commodity hedge funds launched each month. But hedge funds are small compared to the continued market entrée of investment banks. They have a larger capital base than hedge funds and are more established in the energy business through both trading and project finance. What the big banks are up to is unprecedented. They are active in both the financial and physical energy business globally and are hiring traders in New York, Houston, London and Singapore and eyeing Dubai and other locales. The convergence of the physical and financial markets and the loss of trading floors are moving the complex into an era of more price volatility. Since the banks need access to information flow that previously was available on the commodity trading floors, they are gaining that access to market information and de facto price discovery by ownership of oil and gas pipelines, storage facilities, power stations, renewable energy production and the like particularly in illiquid markets. Today, we size energy trading at over $3 trillion in notional value and that may be an understatement as I have seen one analyst say that the over-the-counter NewsFlash markets for oil may be 18 to 20 times larger than NYMEX. FPl GrouP boosts That is substantially less than solar the over $200 trillion forex FPL Group plans to trading, $35 trillion credit invest $2.4 billion to derivatives market, and a increase solar energy total derivatives complex of power production. That will include $1.5 million over $450 trillion. Energy in solar investments in trading is now in a more Florida and california in rapid market maturation the next seven years. process fueled by higher FPL is planning to sustained energy prices, build 300 megawatts of solar generation more price volatility and gloin Florida that would balization. These changes avoid about 11 million create a market opportunity tons of carbon dioxide of perhaps $20 to $40 trilemissions over a 20-year period. lion over the next 15 years as (GUEST OPINION) commodities typically trade six to twenty times the physical. The reason for this is that oil is a fungible global commodity. The impacts on consumers are higher energy prices Peter Fusaro to come, despite claims by PHoto By stEPHEn MayErs politicians and regulators that they can do something to bring prices down through regulation. The world consumes more electricity and transportation fuels each year. Cheap energy is gone forever. Environmental restraints in the form of carbon costs are going to add another layer of higher energy prices particularly for electricity consumers. I foresee a further 40 to 50 percent rise in electricity prices as new generation, transmission and distribution equipment is deployed. It will need to amortized. Anyone who believes that energy will be cheaper in the future needs to remember that energy today is still cheap compared to the 1970s. The financial energy markets are about to unleash a wave of unprecedented innovation in new technology that is more energy efficient, more environmentally benign and more costly. Energy market acceleration in this new energy trading world occurs where commoditization of weather and the environment are joining oil, gas, power and coal as part of an enlarged cross commodity trading complex. Large corporations are going to have to learn to manage price risk proactively because with these higher prices come more price volatility as we enter the real-time energy trading world. Please remember that traders trade volatility not just price. The free ride of cheap energy prices and lower price volatility during the 1990s has been supplanted by the new energy market dynamics. Risk is now more pervasive in a multiplicity of dimensions and includes market, weather, climate, regulatory and geopolitical factors, to name a few. These must all be managed. Who are the winners in this new energy world? Oil, gas and coal producers, renewable developers, clean technology entrepreneurs, hedge funds, brokers, banks, software companies and electric utilities – but not consumers. They take it on the chin in higher energy prices and will need to look at new technologies for load aggregation, demand response, energy efficiency and other costly services to obtain any benefits. It’s clear sailing ahead for the development of this new energy trading and risk management world. Cyberspace has made this go global and go faster. Markets today are not for amateurs but for the professionals who can manage risks in many flavors and varieties. I continue to say, “Energy is a risky business!” Peter C. Fusaro is chairman of Global Change Associates and co-founder of the Energy Hedge Fund Center. 16 E n E rgyB i z November/December 2007 http://www.energycentral.com

Table of Contents Feed for the Digital Edition of EnergyBiz - November/December 2007

EnergyBiz - November/December 2007 Contents Continental Grid Vision Needed Readers’ Views and Opinions Next for National Grid Clearing the Air The Need for Nuclear Energy Trade Status Report The Innovators California On The Leading Edge FERC Sparks Change Getting Coal Right Leadership in Times of Turmoil Innovation Delivers Return A Tale of Two IPOs LNGs Bright Prospects Generation Techologies The Age of Superconductors Leaders with Vision Get Ready for Plug-in Hybrids Betting on Batteries Cost of Decarbonizing Nuclear Helmsman – A chat with Dale Klein, Chairman of the U.S. Nuclear Regulatory Commission Global Energy Snapshot; Low-Income Energy Help; IT Spending Robust; The Greening of State Regulators; Generating Support Simplifying Offshore Wind Regs Chasing Construction Costs Energy Agency Sets New Course Deregulation Means Higher Rates Go-To Staffer Nightmare in Manhatten

EnergyBiz - November/December 2007

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