Some Natural Gas Articles

This Detroit Free Press article illustrates how typical families both feel the effects of higher natural gas prices and use contracting options (such as the “budget plan” that smooths their bill out over the year) to mitigate those effects.

The Bush administration argues for increased natural gas exploration to increase supply. Good point, valid, but as this Austin-American Statesman article points out, much of the pressure in the natural gas market is driven by increased demand.

Basic industries, such as fertilizer and ammonia makers, that use gas to produce their goods are already laying off workers. And experts warn that a warming trend — in the economy or the weather — could cause a spike in prices for the electricity that cools homes and runs every sort of business.

“You would have thought that the last big upsurge in prices a couple of years ago was a tremendous wake-up call,” said Gwyn Morgan, chief executive of EnCana Corp., a Canadian company that is North America’s largest independent natural gas producer. “But for most people it was not.”

The market manipulation by companies such as Enron has gotten much of the blame for the price surge of 2000 and 2001. But now — like then, most analysts agree — the basic law of supply and demand is at work.

With natural gas promoted as a cleaner-burning fuel than oil or coal, nearly all of the electric plants built since 1998 are designed to be fired mainly by gas. So demand is up. Although drilling has increased about 25 percent in the past year, much of it has been confined to old, overworked basins that are not as productive as they once were. So supplies have not kept up.

This longer version of the above story, from the New York Times, points out even more clearly the dynamics at work in this market:

The fertilizer industry has been particularly hard hit, since natural gas accounts for 90 percent of the cost of ammonia, the building block for nitrogen fertilizers. Robert C. Liuzzi, chief executive of CF Industries, a farm-supply cooperative based in Long Grove, Ill., said high natural gas prices were the most serious threat to the industry since the energy shocks of the 1970’s.

Ammonia manufacturers are not faring any better, with factory closings becoming common. Mississippi Chemical, an ammonia company based in Yazoo City, Miss., filed for bankruptcy protection last month. The company idled a plant in Ohio, cut production at another in Tennessee and shut down a factory in Donaldsville, La., resulting in the loss of 24 jobs. …

Power generators that are capable of switching their plants to fuels like oil or coal are doing so to mitigate their dependence on gas. But analysts say that this, in turn, is contributing to higher prices for those fuels.

Over all, about 23 percent of the nation’s energy needs are met by natural gas. The United States is a large producer of natural gas, second to Russia, and 85 percent of the gas used here comes from domestic wells. But many parts of the country remain off-limits for drilling for environmental reasons.

This article is really good; I recommend that you read the whole thing if you want a quick overall picture of the issues in natural gas markets.

On the consumer demand side, high natural gas prices are likely to induce more consumers to invest in energy-efficiency technologies, a strategy that the thoughtful Bill Prindle of the American Council for an Energy Efficient Economy advocated as the primary short-run response in his testimony yesterday before the House Subcommittee on Energy and Minerals.

Price increases serve as the most effective inducement to conservation, because they signal to consumers large and small that the relative value of natural gas has increased. If they value it sufficiently, they’ll suck it up and deal with the price increase. If they don’t, or can’t, then they conserve.

“Can’t” there reminds me: the Low Income Home Energy Assistance Program (LIHEAP) is a federally-funded energy bill subsidy for low-income households. So there is a “safety net” for low income families who face higher bills. I’m not convinced that it is administered or marketed in a way to ensure that eligible families get the most bang for the buck out of it, but it’s in the existing regulatory toolkit.

In any case, I hope this growing concern over natural gas will produce a constructive, thorough conversation about the interaction of various fuel and environmental decisions, as well as how best to induce conservation and investment. It’s an overdue conversation.