Daily Recap: Natural Gas Prices Sky High Too

As discussed before, all fossil fuels are at historic highs currently. Natural gas is the only major fuel that is not at an all-time high in the US — but that record could be broken this winter, if not before. The key reasons emerge from both supply and demand.

On the demand side, our consumption is rising swiftly. After a 6.5% leap in consumption in 2007 (almost half of global demand growth), the EIA predicts another 2.2% of demand growth in 2008.

On the supply side, there is a decline in production in our top source of imports, Canada. The decline was 2.5% in 2007. Also, the global market for Liquified Natural Gas (LNG) is tighter than last year. We are receiving less than half the LNG imports of last year due to the higher price paid by consumers in the UK and elsewhere. The supply side savior is the increased domestic production which rose 4.3% in 2007 and is predicted to grow more than 5% in 2008.

All these factors together has resulted in a reduction in domestic storage of 15% from last year. There is little fear that we will run out of storage, as last year was a record storage year. But the tight market is a remedy for continued increases in prices.

Today, the price of natural gas hit $12.99 per million Btu (MBtu), 73% higher than last year at this time. It is the highest since December 2005 after Hurricanes Katrina and Rita disrupted domestic natural gas production.The price crested on December 13th, 2005, at $15.78 (less than 25% higher than today’s price). So, a continued rise in the price of its chief competitor fuel, oil, along with a cold winter and potentially a hurricane in the Gulf of Mexico, could send natural gas to a record high within a few months. In fact, early 2009 future prices of natural gas in the UK are above $18 per MBtu, so if we need to attract LNG imports to our shores – we’ll have to reach some level of parity with that much higher price.

Such record high prices would mean much higher heating bills this winter and higher electricity bills this summer and moving forward. An article in today’s USA Today discusses 29% price hikes for electricity across much of the US already. Natural gas is a key price setter for electricity as the top source of marginal electricity during peak loads. So, the message is clear: if we want to keep your electricity and heating bills on par with last year, we will need to focus on the efficiency of our appliances and, yes, wear a sweater.

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