Many consumer’s who use natural gas in the winter time wonder how much they will end up spending on natural gas to heat their home. Natural gas tends to tie up a lot of money compared to most other energy costs in a home. Heating a home is more expensive then air conditioning, lighting, computers, washing machines, dryers and other similar home appliances. The cost of natural gas rises when the storage levels of natural gas are lower then what the energy companies expect to need during peak demand times. By natural gas prices rising during these times it becomes an incentive to consumers to regulate the amount of natural gas they use during these demand times for natural gas. Just this month we had an issue in Mexico that caused natural gas prices to rise 15%. The sabotaged natural gas pipelines were blown up in Mexico causing them to lose a lot of supply and the ability to trasnport it. This international crisis impacted the United States. From this example you can see that natural gas not only affects us on a state by state and national level but also internationally. Starting in 2002 we saw as Texas Electricity became deregulated and forced natural gas prices up further. Texas primarily relies on Natural Gas to generate electric power. The electric prices in Texas have a large correlating affect with natural gas rates. This up-ward trend in natural gas prices was primarily do to Texas becoming the most competitive electricity market in the world. The demand for electricity and the natural gas used to produceit has steadily increased. Texas and other similar states and countries rely on natural gas in the same way and the consensus is that gas prices will continue to rise in the long term. Winter only makes the situation worse as everyone not only uses electricity but turns on their natural gas to heat their homes.
The Short-Term Energy Outlook has built into the natural gas rate the up-coming hurricane season with an expected 15 hurricanes and of those some expected to come through in the gulf where there is quite a bit of fossil fuel infrastructure. This hurricane season could take awy some needed natural gas surpluses and cause rates to rise. This estimation of what natural gas will do is only speculation based on weather but it wouldn’t be wise if we just didn’t say anything at all. The winter forecast is a normal one so we shouldn’t have excess heating in residential homes. This will allow the natural gas in storage to be sufficient to cover the needs of those in the United States. The EIA also expects that natural gas supplies will be sufficient to satisfy all residential consumers in Texas and the rest of the nation. The EIA predicts that the average residential price of natural gas in the Midwest will be about 20% lower than last winter, while consumption will be about 5 percent higher this winter. Because of the above assumptions there should be quite a bit less spent on natural gas this winter compared to last.
Â To understand the volatile nature of natural gas we will go into some description on the commodity and some details that can cause its high price spikes..
Where Does The Natural Gas Come From That I Use For My Home?
Â Most of the natural gas used in the United States comes from domestic gas production. The remainder comes from imports, primarily from Canada. Domestic gas production and imported gas are usually more than enough to satisfy customer needs during the summer, allowing a portion of supplies to be placed into storage facilities for withdrawal in the winter, when the additional requirements for space heating cause total demand to exceed production and import capabilities.
Natural gas is injected into pipelines every day and transported to millions of consumers all over the country. Much of it travels long distances from production areas to population centers through interstate pipelines owned and operated by pipeline companies. Natural gas is generally delivered to residential customers and other end-use consumers through the complex network of pipes owned and operated by local distribution companies (LDCs).
What Is The Natural Gas Bill Charges Made Up Of?
Â There are two main components to any natural gas bill. There is the cost of transmitting and distributing the natuarl gas and the commodity costs. Keep in mind there is also the sales tax which in Texas would be (8.25%)
Â Transmission and distribution costs – This involves transporting the gas through gas pipelines from the facility it is produced in to the local gas company and finally from the local gas company to a consumer’s house.
Â Commodity costs – This is the actual cost of the natural gas not including the transportation or anything else. Find gas’ current price here. NYMEX
The wellhead price also known as the commodity price of natural gas has made up more then 50% of the cost of natural gas. The efficiency of delivery and transportation of gas will further increase that percentage as technology continues to advance in that area. We have seen in the past 5 winters where natural gas at the wellhead has comprised the biggest percentage of the cost. The added demand and reliance upon natural gas will see the natural gas price rise as well. If you look at the power plants in Texas and the trend then you should know that the natural gas commodity is in high demand with almost a 91% correlation with the price of electricity in Texas we see the state that will most likely drive the price higher. Residential Natural Gas is not going to go down dramatically in price until more nuclear power plants are built to alleviate the demand off of natural gas. The resulting high natural gas prices can be attributed to several market factors. Weak natural gas production in the face of increased drilling levels, colder weather over consecutive weeks during the heating season, hurricane production disruptions in the Gulf of Mexico, decreased net imports, and record high crude oil prices are the primary factors as to why natural gas prices have reacted as they have. One often missed additional disruption is the Mexico natural gas pipeline sabotage which raised gas prices 15% during the month of September 2007.
Figure 1. Dissection of Natural Gas Prices by Residential Consumers
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Heating Season
Mcf = Thousand cubic feet.
Â Issues That Change Current Natural Gas Prices
Â There are a number of issues that have prevailed for most of 2007 that have affected the gas price. Depending on the issue, each changes the price upward () or downward () in relation to the pressure on prices. These
Â issues include:
Weak Natural Gas Production â€“ Production decreased by about 3% percent back in 2005, this was below 2000 levels, and coming down to the lowest production level since 1993. The natural gas industry in 2005 drilled the most natural gas wells in a single year then at any other time, in the 2006 summer we saw natural gas rigs drilling for gas hit a record. Producing gas wells have risen each year since 2000, rising from 340,000 wells in 2000 to more then 405,000 wells in 2004. The production of natural gas wells has not been proportional. 2006 well production is expected to be about 1 percent over 2005 levels, although the first 8 months of 2006 compared with 2005.
Declining net imports â€“ Net imports increased by about 6 percent in 2005, pipeline imports in 2006 are going to decline more than enough to offset a 3 percent increase in liquefied natural gas (LNG) imports. With a slight increase in total exports, net imports are expected to decrease by roughly 5 percent in 2006.
Â High Demand â€“ Natural gas demand has been strong in 2006, mainly due to the strong performance of the economy. We have also seen increased demand because of an unusually hot summer in 2006 which has demanded increased levels of natural gas to run air conditioners via the electric power generators that create the electricity using natural gas.
Â High Oil Prices â€“ Some large-volume customers (primarily industrial consumers and electricity generators) are able to choose between natural gas and other fuels, such as petroleum products, depending on the prices of each fuel. As a result of this interrelation between fuel markets, when oil prices rise, the competitive pressure to maintain low gas prices diminishes, and the shift in demand to natural gas drives prices upward. Crude oil prices by early October had declined to below $60 per barrel for the first time since this past Spring. Crude oil prices increased to more than $70 per barrel during summer 2006 and over $83 per barrel in Sept 2007 breaking record highs. Geopolitical concerns have contributed to rising oil prices over most of the year.
Â Natural gas inventories â€“ Based on reports from underground storage facilities for October 6, natural gas in storage was 3,389 Bcf, which is 12 percent above the 5-year average of 3,031 Bcf. Total working gas in storage is currently above average largely because of two mild winters in a row, which resulted in the largest end-of-winter volume in 15 years. Storage stocks since then have remained well above average despite lower-than-normal net injections the last 2 summers. Although natural gas inventories are expected to track at above average levels through the rest of 2007 as long as weather conditions remain close to normal, the relatively low injections during the summer have caused worries about supply adequacy in the coming heating season.
Â Weather Effects â€“ In 2005, Hurricanes Katrina and Rita caused terrible service disruptions and shut-ins of natural gas production in the Gulf of Mexico, which caused record high prices for crude oil and natural gas. In 2007 we have additional hurricane worries as multiple hurricanes are expected to come through the Gulf during hurricane season. The hurricane activity contributed to an already tight energy market, which was aggravated by warmer-than-normal summer weather in 2005. As of September 2006, there was no significant storm activity in the Gulf of Mexico, although recovery operations from 2005 hurricanes continue. Above normal temperatures during the summer, particularly in July and August in 2006, which hit most of the USA, put upward pressure on natural gas prices. Finally, a return to normal weather this winter will increase heating demand as temperatures are expected to be colder than last year.
Â Average Natural Gas Prices in the United States
Starting in 1999 natural gas has set a trend of increased upward levels in price. The 2005 national average residential price of $12.81 per thousand cubic feet (Mcf) exceeded the 2000 average price by more than $5 per Mcf. The national average price of natural gas is only part of the story, as the prices in individual States can differ greatly. These differences are often related to a marketâ€™s proximity to the producing areas, the number of pipelines in the State, and the transportation charges associated with them, as well as State regulations and degree of competition. For example, based on 2005 data, the residential consumers along the Atlantic Coast tend to pay the most, with prices ranging from $14 to more than $20 per Mcf (Figure 2). In contrast, States in the rest of the country benefit from either indigenous production or the presence of major trunk lines traversing the State. The availability of relatively abundant supplies results in prices between $10 and $13 per Mcf.
Figure 2. U.S. Residential Natural Gas Prices by State, 2005
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â (Dollars per Mcf)
Source: Energy Information Administration, Natural Gas Monthly, September
How Much Will Natural Gas Cost This Winter?
Â Each year, EIA projects the average price, consumption, and total cost of natural gas during the upcoming winter for a household in the Midwest. (The Midwest is used because over 79 percent of its 25.1 million households heat their homes with natural gasâ€“the highest concentration of any region.) For the heating season of 2006-2007, EIA estimates that Midwest homeowners will pay about $1.07 per therm (1 therm=100,000 Btu, which is the heat content of about 100 cubic feet of gas), or about $11.01 per Mcf, for natural gas this winter (Table 1).
Table 1. Average Midwest Household Heating with Natural Gas
Â Mcf = Thousand cubic feet. 1 Mcf=10.27 therms. (Based on the national average gas
Â heat content for gas consumed by other than electric utilities in 2004. Source: Energy
Â Information Administration, Natural Gas Annual 2004, (December 2005), Table B2.).
Â Source: Data and projection: Energy Information Administration, Short-Term EnergyÂ Outlook (October 2006).
Assuming a return to normal temperatures, this winter will be colder than last winter. This should result in increased gas use by more than 4 percent for the representative Midwest residential gas customer. This increased gas use, coupled with the projected price decrease of almost 18 percent, would result in a decrease of about 14 percent in total expenditures for gas by the representative household (Figure 3).
Figure 3. Total U.S. Residential Natural Gas Expenditures
Â Source: Energy Information Administration, derived from data in the Natural Gas Monthly,
Any forecast is uncertain, and changes to key factors could alter the forecast significantly. Key factors that may affect market prices and consumption regardless of region include:
Â A prolonged cold spell or even a brief episode of severe winter weather would increase per-household use of gas and total demand in the high-consumption winter months.
Â Disruptions of the pipeline or LNG delivery systems would affect deliverability of natural gas.
Â Problems in other energy supplies, such as a prolonged outage of a nuclear or coal-fired power plant, could increase use of gasfired generators, thus increasing gas demand.
Â Although increased commodity prices are passed along to consumers, residential households enjoy some protection from sudden, severe price fluctuations. This is partially because residential bills do not reflect daily market prices but rather the overall cost of an LDCâ€™s supply of gas, which depends on the LDCâ€™s usually diverse portfolio of supply sources and prices. This translates to a price to the consumer that is much more stable than the often highly variable daily â€œspotâ€ prices. Also, transmission and distribution services, which are much more stable between years, make up a large fraction of residential bills. Further, residential customers have a number of steps they can take to mitigate the impact of commodity price changes.
Â What Can Residential Customers Do?
Â To cope with or reduce their gas bills, residential customers can:
- Shop for lower-priced gas, if their State sanctions customerÂ choice programs. (For information on the status of natural gasÂ residential choice programs in each State, go to:Natural Gas Choice and Comparison
- Participate in their local gas companyâ€™s yearly budget plan toÂ spread gas costs evenly throughout the year, thereby lesseningÂ the impact of higher prices.
- Check gas appliances and space-heating equipment for efficientÂ operation.Obtain a home energy audit to identify ways to conserve energy.
- Reduce thermostat settings, especially when they are not atÂ home.
In addition, both Federal and State energy assistance programs are available to natural gas customers who have a limited budget. For example, the Low Income Home Energy Assistance Program (LIHEAP) is a Federal program that distributes funds to States to help low-income households pay heating bills. Additional State energy assistance and fuel fund programs may be available to help households pay energy bills during a winter emergency. To find out if you qualify for assistance in your State, contact your State public utility commission or your local gas company.