Why Are Natural Gas Prices So High?

Consumers burning up over heating and electricity costs may be wondering how they got there.

According to the U.S. Department of Energy, Americans will pay $834 million to heat their homes this year — $300 million more than in 1999. The DOE also forecasts a 40 percent rise in natural gas prices and a 29 percent hike in fuel oil.

And while predictions of warmer weather are pushing the wholesale price of natural gas down for February, utility rates are still going up. Power companies in California, Ohio, Colorado, Illinois, Indiana and elsewhere have announced or are requesting rate hikes to cover increases in the wholesale price they’ve had to pay this year for natural gas.

The effects of the price rises ripple well beyond the higher costs for heating homes or burning lights. For example, because fertilizer plants have been forced to reduce their production, farmers will be facing higher prices this spring, and those increases will surely be passed on to consumers.

Here are some questions, and answers, about why prices have risen so far, and what attempts are being made to combat the problem:

How Close Are We to a Crisis? The United States uses about 20 trillion cubic feet of natural gas a year, and has 1.9 trillion cubic feet stored, with reserves estimated at 164 trillion cubic feet. Energy analyst Kyle Cooper, of Salomon, Smith Barney in Houston, says the price rise doesn’t mean that the United States is going to run out of gas, only that there’s less of it to go around this winter.

“We certainly need to begin developing more supplies, or we could hit a crisis, but I don’t think we’re there yet. It’s just tight, much tighter than it’s been before, and that does have people spooked about the ‘what-if’ possibility.”

The “what-if” involves a shortfall in the supply forcing a drastic rise in fuel prices, rationing or blackouts. While colder-than-expected weather (and the corresponding increase in gas consumption) cannot be predicted, natural gas holdings should be able to cover unforeseen circumstances.

If There’s So Much, Why Can’t We Get It? Oddly enough, one reason natural gas has become expensive of late is because it’s been comparatively cheap compared to other fuels.

With natural gas prices low, and with warmer winters cutting homeowner demand, producers in recent years have been slow to invest in the infrastructure to tap new natural gas sources. As the economy has grown, industrial use of natural gas has risen, and so reserves have been eaten into at higher rates, just when homeowners — blasted by this year’s storms — needed it most.

“After three years of a very warm winter, and very solid economic growth, the demand for natural gas has risen a great deal, and the supply really hasn’t risen very much. So it’s just a much tighter balance than the industry has been used to,” says Cooper.

In order to loosen things up, suppliers will have to tap more resources and build new delivery capacity, including pipelines.

If It’s Hard to Get At, Why Are We Trying to Use More?

Natural gas is transported by pipeline to urban areas or industrial centers. Although natural gas can be liquefied for easier transport by truck or ship, this process is more expensive, and therefore domestic sources for natural gas are preferable to imports. Approximately 13 percent of natural gas is imported, and only about 1 percent of North American natural gas is exported.

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