The Hotline Newsletter

The Natural Gas Crisis

Last year, natural gas prices doubled, tripled, and eventually quadrupled. As we started 2001, prices at the wellhead had risen from $2 to $9 per million Btu (MMBtu).

Some areas didn't feel the immediate pinch as much due to state regulation of their local utility's pricing. Now this is starting to change. For example in Detroit, the local gas utility just jumped up natural gas prices by 50%. Their customers will feel the pain of higher gas prices next heating season.

So what happened and when will natural gas prices go back down? Although the experts may disagree over the cause, they do agree that natural gas will be more expensive and will stay that way. Alternative fuels will be no better off.

Per John Cook, Director of Petroleum Division of the US Department of Energy - Demand has exceeded production. Prices at the wellhead this summer should average $5 per MMBtu which is double the cost from last summer. In the short term, increases in gas production will be pressed to keep pace with growing demand brought about partially by new natural gas-fired electrical generation plants.

The natural gas shortage is the result of complex problems that have been building for years and it won't be fixed quickly. A string of recent mild winters reduced both the demand and price. This reduced gas prices and drilling that allowed shortages to build. Then last summer, gas was in big demand for the first time to replace oil and coal as the fuel for many of our electric power generation plants for environmental and economic reasons. This was something new because the summer has normally been a time when gas producers store gas for the upcoming winter heating season. When a cold winter hit last November, there was not enough gas to go around.

This past winter's gas crisis may only be the tip of an iceberg. Historically our natural gas usage increased 1.4% per year. This year it will be up 4%. According to the Energy Information Administration, we will need 20% more natural gas by 2005 and 50% more by 2015. The key driver is the skyrocketing demand for gas-fired electricity.

The big problem is where do we get more natural gas. The U.S. consumes 28% of the world's natural gas, but unlike oil that we import from 25 other countries, 99% of our natural gas is produced here in North America. Unfortunately, natural gas production peaked in the U.S. during 1973 and has flat-lined since then. The remaining gas will be more difficult and expensive to extract, produce and distribute.

It's a sure bet that the low natural gas prices seen during the past few years won't be back. One way to reduce your fuel bills next winter and for years to come is to use less gas. A good place to start is by investing in a more energy efficient space heating system. You can't control the price you pay, but you can control how much you use.