Natural Gas Prices: Overview of Market Factors and Policy Options
Publication Date: January 2001
Publisher: Library of Congress. Congressional Research Service
Author(s):
Research Area: Energy
Type:
Abstract:
Natural gas prices increased steadily during 2000, as demand for gas-fired electric power production grew sharply. When cold winter weather arrived, heating demand - coupled with ongoing electric power demand - drove spot prices up. In one short-lived and isolated episode, gas touched $30 per thousand cubic feet (mcf) - the energy equivalent of $175 per barrel oil.
Residential customers rarely buy spot market gas themselves. At the start of 2001, they were paying just over $9 per mcf for delivered gas on a nationwide average basis, an increase of 39% from a year ago. It is likely that this price will be higher when January 2001 bills are mailed to consumers, as spot market prices have remained high. Most gas supply arrangements only offer short-term protection against price volatility; they ultimately converge on spot prices.
Large commercial, industrial and electric generation consumers generally procure their own gas supplies and arrange for transport. Since they do not have to pay local utility distribution charges, these big users pay less for delivered gas. For 2000, industrial and utility users paid about 40% of residential levels.
Low wellhead prices and deregulated long-distance transport costs led to growing demand during the 1990s. Demand - which grew 36% from its 1986 low - reached a peak in 1996 and 1997. Most notable was demand from gas-fired electric power plants, where consumption rose by almost 50% during the 1990s.
Warmer winters in 1998-99 and 1999-2000 kept gas demand low, and masked a decline in supply; as U.S. gas output fell about 9%, prices remained stable until 2000. Another mitigating factor has been growing imports from Canada, which helped offset most of the domestic output drop. Imports held prices steady into 2000, when the growth in demand interacted with inelastic supply and prices rose sharply. Late-January spot prices are in the $7 to $8 range, plus transportation and distribution charges. If average flowing gas prices converge on spot, current markets suggest that residential prices, for example, could rise by another $1 to $2 per mcf.
How might the present supply-demand relationship be resolved so that prices return to more accustomed levels? On the supply side, it is likely that U.S. production will increase as the number of wells being drilled has doubled during the past 12 months. More output should flow in response to higher prices. More imports of liquefied natural gas (LNG) are being planned at four existing terminals.
With regard to energy policy, the discussion has barely begun. Policymakers may focus on the role of gas in power production, producer incentives - including making more federal lands available and tax incentives - and conservation measures. And the impact of price on demand has not come to its full effect. The combination of increased production and price-induced conservation might balance supply and demand at a more comfortable price level.