[BETA] Fortnightly

High Gas Prices:

Conservation programs, plus an erosion in domestic manufacturing, will lead to a falloff in gas demand.

Although there may be surprises this upcoming heating season, current high prices and past fixed investments in conservation will contribute to a decline in expected demand for natural gas in all sectors over the next several years. For major consuming parts of the country, when the cost of gas relative to an indicator of consumer budgets increases by 50 percent, residential gas demand will decline 5 to 7.5 percent on a monthly basis. This price effect could even take some of the edge off of price when demand peaks this winter.

A newer type of conservation program also should influence expected demand. Such conservation programs were initiated in Oregon by Northwest Natural Gas in late 2002 and are likely to be initiated by other utilities throughout the United States in the future. ¹ These programs allow utilities to receive a return for conservation gains. Utilities now have an incentive to make efficiency improvements to existing equipment and infrastructure and to work with customers to reduce usage. Previously, there could have been a cost to the utility from lost sales. The American Gas Association and the National Resources Defense Council endorsed such programs in July 2004. ²

Natural-gas prices rose enough in the last several years that retail electricity in some utility service areas in the Southeast is now competitive with natural gas for such services as space heating (when differences in efficiency of natural gas and electric equipment and maintenance costs are taken into account). These natural-gas utilities could lose an increasing number of customers to electric utilities. Fixed costs associated with serving the lost customers would then be passed on to remaining customers, increasing their cost of service and further eroding the competitive position of natural-gas utilities but increasing the gains for remaining customers from conservation initiatives. Consequently, gas demand would dip because of customer losses and increased conservation investments.

Industrial Dip

Recent statistics indicate that industrial consumption of gas fell by 16 percent between 1997 and 2003. ³ This trend is likely to continue in the future since industrial plants, especially manufacturing plants and other energy-intensive industries, have been hiring few, if any, additional workers; in fact, many plants continue to reduce the number of workers. Employment in manufacturing is significantly below levels experienced during the 1990s. In the energy-intensive chemical industry in New York, employment has been declining for 10 years and is now about 65 percent of its 1993 level.

Why is this important? Because when industrial plants reduce their number of employees, they often reduce the amount of equipment they use or the number of hours they operate each piece of equipment. The reduction in equipment use reduces energy demand.

Recent growth in industrial output is explained largely by efficiency improvements from better business practices and worker productivity, but some of the growth is explained by increased investment supported by low interest rates and substantial profits. Both better business practice and new equipment investment, especially when the new