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Gas Crisis Forum: Prices Pointing Skyward!

Gas prices are likely to remain high in the near term.
Fortnightly Magazine - August 2003

government needs to determine why accessible Rockies gas is not getting to market. Even the lowering of the interest rate to levels not seen in 45 years is not boosting investments in this business.

Nonmanufacturing Demand Continues to Increase

Although the shutdown of fertilizer plants as a consequence of high natural gas prices is important, there is no surprise here. In 1998, fertilizer exports were double fertilizer imports. Today fertilizer imports are greater than exports. The importance of fertilizer production to the economy has been on the decline. As fertilizer and other chemical plants continue to shut down, this will reduce demand for natural gas and increase overall supplies, but the impact on price and on the economy will probably be modest.

Yet natural gas is the fuel of choice for new investments in power generation, and natural gas demand is expected to grow, though modestly and despite high prices, because of very efficient combined-cycle gas units.

Natural gas also is used to heat a majority of homes and commercial establishments in the United States. In the heating season months from November to March, volumes of natural gas sold and household bills can easily increase east of the Rockies fivefold from their level prior to the heating season. But that is only part of the picture.

Residential and commercial business customers are going to be greeted not only with continued high prices for the commodity but also increases in their cost of service from uncollectable bills and cost adjustments from past winters when prices soared. These costs will continue to surface in bills into the next year.

Moreover, it is not just the price customers pay for the commodity and for gas service that has increased significantly over the last several years, but the size of the housing market. The purchase of new, larger homes and the building of additions on existing homes means that costs of home heating would have increased for many consumers even without the large price increase for the commodity and standard gas service.

A clear view of the situation surfaced this past winter, when residential use of natural gas from November 2002 through January 2003 grew by almost 25 percent over the previous year. This increase was greater than expected and is a break from much of the past, when high prices inspired conservation and a reduction in consumer demand.

Heating season 2001/2002 was exceptionally mild. Hence volatile natural gas prices fell significantly and inventories of natural gas remained high relative to year-earlier levels. These inventories continued to build throughout the nonheating season in 2002. Accordingly, inventory supplies in November 2002 were very similar to levels in the previous year when they were quite high, and prices subsequently fell.

Plentiful supplies in storage in November 2002 should have caused some decline in price, so why didn't prices decline? Because there had been a fundamental increase in demand. The recent reported EIA consumption statistics for November 2002 through January 2003 indicate this. 8 Unless the weather turns out to be extraordinarily mild, with a cool summer and a