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The Truth About Natural Gas Prices

If you haven’t grown up using natural gas in your home, then you might be a little fuzzy about using it as a home utility. Unlike rising oil prices or electricity outages, natural gas isn’t talked about much in the news. And that’s mostly because natural gas is safe, quiet, and keeps to itself as it passes through underground pipelines.

At the same time, whereas oil is sold by volume or weight (typically by barrels or tons), natural gas is sold by unit of energy. As a result, its prices are quantified in unusual units and varying terms (like Ccf, Btu, and Therm), and that doesn’t make it easier to understand either (though this handy little unit converter might). So, let us clear the air a bit about natural gas prices and how they come to be, and you might just find that you’re already more interested in using this source of energy than you realize.

What are the major factors that affect natural gas prices?

As you probably learned on the first day of your Economics 101 course, the market prices of most things are mainly a function of supply and demand. And natural gas prices are no different, though it is a bit more complex than that. So, let’s dig in a little deeper on both halves of that balance.

On the supply side, natural gas prices usually shift due to:

  • Variations in the amount of natural gas production.
    • Severe weather, such as a hurricane in the Gulf of Mexico, can disrupt production and destroy natural gas infrastructure. And if these variations are drastic enough, prices will shift to accommodate.
  • The volumes of natural gas imports and exports.
    • Most of the natural gas consumed in the United States is produced domestically. In 2014 alone, our country’s dry natural gas production was equal to about 96% of the total U.S. natural gas consumption. But, with our exchanging of natural gas among other countries, the amount available at any one time is constantly in flux.
  • The amount of gas in storage facilities.
    • Of course, any hiccups in new productions can be reduced by the amount of gas a company has on reserve. And production companies can draw from these storage loads as necessary, but it’s a risky move to drain them entirely.

In general, decreases in supply tend to push prices up, which encourages production, imports, and sales from storage inventories. On the flipside, increases in supply tend to pull prices down which, in turn, puts the brakes on production, imports, and storage sales.

And when looking at the demand side, natural gas prices usually shift from:

  • Intense temperatures during winter and summer weather.
    • During these peak demand periods with their more extreme temperatures, people use more natural gas because they want to stay comfortable in their homes. As a result, this increases natural gas demand by electric power plants.
  • Market conditions, including the level of economic growth/decline.
    • In general, during any given year, the natural gas market itself can grow to include more customers, or it can shrink when customers leave it. For instance, Forbes recently predicted that demand for natural-gas-powered vehicles is set to skyrocket in the coming years, both from consumer ownership of these vehicles as well as the increased demand from compressed natural gas (CNG) freight transport vehicles. This, of course, would create a natural increase in natural gas consumers and, thus, consumption.
  • The prices of competing fuels.
    • Demand for a single fuel type can be lessened by other fuel types. For example, some large-volume fuel consumers – such as electricity generators and iron, steel, and paper mills – can switch between natural gas, coal, and petroleum, depending on the cost of each fuel. As a result, when the cost of one fuel falls (such as petroleum), the demand for another (such as natural gas) may decrease, which would lead to lower prices for natural gas. On the flipside, when the costs of competing fuels rise in relation to the costs of natural gas, switching from those fuels to natural gas may increase natural gas demand and, eventually, its prices.

As a general rule, increases in demand tend to lead to higher prices, while decreases in demand tend to lead to lower prices. For an example of this and how such events impacted natural gas prices in 2015, check out this article.

Where does the U.S.’ natural gas supply come from? And how much do we have (and have left)?

Based on analyses of geological and engineering data, the U.S. Dept. of Energy has demonstrated large, proved reserves of wet natural gas. These are estimated quantities calculated to be economically recoverable from known reservoirs in the future. And by the natural gas industry’s best estimates in 2014, nearly 389 trillion cubic feet (Tcf) of natural gas exists in U.S., which will supply the country for approximately the next 15 years, based upon current rates of consumption.

“96% of all the natural gas currently consumed in the United States is produced domestically.”

In addition to the proved natural gas reserves, there are large volumes of natural gas classified as undiscovered technically recoverable resources. These are assumed to exist either because the geologic settings are favorable, despite the uncertainty of their specific location, or they are expected to become producible in time using existing and future recovery technology. And as of January 1, 2013, the U.S. Energy Information Administration estimated that the United States had 1,968 Tcf of undiscovered technically recoverable resources of dry natural gas hidden deep within the earth.

How reliable is the natural gas pipeline system?

While we’ve all heard of the petroleum industry’s horror stories – such as the devastating BP Oil Spill in 2010 – natural gas’ sophisticated pipeline system is one of the safest ways of transporting energy. That’s because this infrastructure is securely buried underground, monitored constantly, and segmented to quickly allow for any necessary repairs.

And even though natural gas and oil share many characteristics (both are hydrocarbons, both are found and produced using similar methods and equipment, and both are often produced simultaneously), they contrast in the way they are shipped. Given its state of matter, being a literal gas as opposed to a liquid, natural gas is difficult to transport. As a result, the large majority (over 90%) of traded natural gas is transported by pipeline. And such a pipeline can connect a single producer with a single buyer of gas – such as a case of a gas field supplying to a dedicated power plant – or it may consist of a sophisticated grid connecting thousands of individual gas producers and thousands (or even – in the case of an urban grid – millions) of natural gas consumers. As a result of this sophisticated gas pipeline and storage system, natural gas prices tend to be set locally or regionally.

At the same time, this sophistication in pipeline infrastructure allows producers and buyers alike the opportunities to both export and import gas from outside these immediate markets. Thus, though the gas price tends to be volatile as a result of continuously reacting to supply and demand, gas buyers’ risks can be managed effectively by trading it on both current and future contracts. It is therefore possible for a buyer to purchase a certain volume of gas, to be delivered at a certain point on the gas grid, at a date five years in the future, at a known price today.

Of course, with each sale, there are also other factors at play that determine the price of natural gas sold. These include:

  • The relative distance of the customer to the producing field
  • The terms of the transportation agreements, as well as transmission tariffs
  • The host government’s fiscal terms and taxes

But, in theory, no individual supplier or buyer is able to control prices and the presence of intermediary parties, such as gas traders, which usually results in more efficient markets and lower prices.

How does a deregulated natural gas market impact the final price? 

So, back on January 1, 1985, the Natural Gas Policy Act deregulated upwards of 60% of the natural gas in the United States. The change allowed competitive energy suppliers to enter new markets and offer their energy supply products to new consumers. In these areas, energy prices are not regulated by the government, and consumers are not forced to receive natural gas strictly from one supplier. Rather, the municipality maintains the utility connection, and consumers can choose their commodity supplier, similar to other common home services like cable TV and high-speed internet.

As a result, natural gas deregulation, gives the power back to the buyer and motivates retailers to differentiate their natural gas products from those of their competitors. This deregulated market encourages them to develop innovative features, pricing plans, benefit programs, and flexible options that they would never have otherwise had a reason to create. And, in the end, deregulation gives the power back to the consumer by allowing them to pick a provider that delivers the best price and service for all their natural gas needs.

So, now that you know more about natural gas prices – which are often more stable than that of oil, cheaper than that of electricity, and more reliable than nearly any other source of energy – you have more power in your hands. And you also have yet another energy option in your pocket, which you can pull out at any time to keep more of your money in there as well.

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