If you purchase printer paper for your business, you can expect to pay a relatively stable price throughout the year. When you pay your natural gas bill, however, the price could fluctuate constantly — even if you use the same amount of energy each billing cycle. Why do products like paper and energy have such different pricing systems when both are in demand?
Unlike paper, natural gas is traded each day in competitive price markets. This system warrants daily price changes that rely on several variables. Understanding the factors that affect natural gas prices can provide insight into natural gas as an energy choice. Depending on your business’s needs, location, and more, natural gas price factors could save you money overall.
Natural gas has become an energy staple in the U.S., but this wasn’t always the case. U.S. natural gas use was first documented in 1626 when French explorers reported seeing Native Americans igniting gases near Lake Erie. As knowledge of natural gas spread and countries set up natural gas infrastructures, the U.S. followed. By 1816, Baltimore, Maryland became the first city to use natural gas to power its streets.
In Fredonia, New York, William Hart dug the first American natural gas well in 1821. Following his success, Hart established the first U.S. natural gas distribution company, known as Fredonia Gas Light Company. By 1836, Philadelphia became the first state to start a municipally owed natural gas company. Of the 900 public gas systems today, the Philadelphia Gas Works remains as one of the largest and most long-standing companies.
Natural gas use spiked during the 20th century as domestic natural gas infrastructure grew. In the 1950s, natural gas surpassed coal as an energy source for the first time. This shift occurred as consumer demand increased following World War II. Today, natural gas supplies over half of residential and commercial energy consumption. According to the American Public Gas Association (APGA), 99% of the natural gas used in the U.S. is sourced from North America.
The factors affecting natural gas prices are largely tied to supply and demand. As supply and demand increases or decreases, natural gas prices follow. Natural gas prices are more nuanced than a simple cause and effect change, but there are general principles that guide their fluctuations.
Supply tends to operate with an inverse relationship to price, where the following is true:
In contrast, natural gas demand has a direct relationship with price and generates the following outcomes:
No matter which way the supply and demand factors lean, the market tends to balance itself out. For example, higher prices may reduce the demand for natural gas and encourage increased production. On the opposite end of the spectrum, lower natural gas prices may prompt an increased demand. Within the supply and demand categories, there are also specific factors that impact prices.
In general, the natural gas supply increases or decreases depending on the importing and exporting situation, how much gas is available in storage, and how much gas is being produced.
Most of the natural gas used in the U.S. is produced domestically, which helps to keep consumer costs low. Despite the abundant supply, high-demand winter months and other unforeseen circumstances may put a strain on domestic natural gas availability. When it’s necessary to supplement the U.S. supply with imported natural gas, 97% of the supply travels from Canada through underground pipelines.
The way the U.S. imports and exports natural gas directly affects its supply. As a net exporter of natural gas, we do not rely on imports as our main source of natural gas. When it’s necessary to import, the natural gas travels a much greater distance than it would if it were domestic. This added distance can increase the natural gas retail price during extreme or unexpected conditions.
The U.S. utilizes three types of underground natural gas storage, including:
Underground storage fields contribute to the available natural gas supply. During sudden or seasonal demands, this storage provides a quick and effective solution. Storage levels typically ebb and flow based on seasonal demand. When natural gas is in lower demand from April to October, storage fields absorb more domestic supply. From November to March, when natural gas is in higher demand, the storage amounts decrease.
Natural gas storage acts as an equalizer to help prevent drastic price spikes. When the storage field supply cannot meet domestic demand, prices will likely increase.
The amount of natural gas produced each day is central to our supply. In ideal conditions, natural gas is produced consistently from wells across the country. Severe weather, like hurricanes, can disrupt this process and impact production capabilities.
In the past, hurricanes in the Gulf of Mexico have deterred nearby natural gas production and led to price increases. Hurricane Katrina, for example, cut oil production by 12 billion cubic feet per day (Bcf/d) in 2005. According to the U.S. Energy Information Administration (EIA), hurricane disruptions are declining as the nation relies on less natural gas produced in the Gulf of Mexico.
Extreme cold can also have a negative effect on natural gas production. In 2011, well freeze-offs had a hurricane-sized impact on natural gas production. Though cold weather is typically less destructive than hurricanes, it hits during the months with the highest natural gas demand. Whether hurricanes or snowstorms, unpredictable weather can lead to a decreased supply and increased natural gas prices.
Changes in the demand for natural gas depend on the economic climate, seasonal weather conditions, and the prices different fuel alternatives offer.
Periods of economic growth prompt an increased demand for goods and services within the commercial and industrial sectors. In tandem with this demand, the commercial and industrial sectors may increase their natural gas consumption. This is especially true for industries that use natural gas as feedstock for making fertilizer or pharmaceutical products.
Natural gas isn’t just influenced by economic growth — it also contributes to it. According to the International Gas Union, the nature of the natural gas industry is economically beneficial. It employs thousands of people, generates millions in revenue, and enables energy-intensive industries to thrive.
Whether the economy is booming on its own or the natural gas industry is propelling it, the increased natural gas demand may warrant increased prices during prosperity.
As the weather changes, demand for natural gas increases and decreases. Natural gas demand is especially high in the winter as businesses and homes rely on heat. This demand could be intensified during sudden and unexpected cold periods when the supply cannot shift quickly enough to accommodate.
In the summer, natural gas demands increase to power air conditioning units. A strong heatwave could crank up the demand even further, especially if storage supplies are low from a cold winter. During extreme, prolonged, or unexpected weather conditions, natural gas prices may increase to match the demand.
Certain high-volume energy consumers, like mills and power plants, are able to switch their energy sources based on what is least expensive. This plays a role in natural gas demand and subsequent prices.
When other fuel sources like coal or petroleum decrease, high-volume consumers may switch over to save money. As a result, the overall demand for natural gas decreases and lowers the price. Conversely, when the prices of alternative fuels rise, high-volume consumers may switch to natural gas. The increased demand for natural gas would increase its price.
Though these demand shifts still contribute to natural gas prices, the EIA reports fewer industries are shifting between energy sources. This decline is due to a variety of factors, including:
As key industry consumers switch less, natural gas prices may rely less on alternative fuels for demand-related price shifts.
It’s proven that an increased natural gas supply lowers prices. But how long will our abundant supply last? And what if the consumer demand increases beyond our supply capabilities? To answer these questions, it’s helpful to take a look at the natural gas supply and demand outlook for the coming years.
Both short-term and long-term EIA reports predicted increases in natural gas production. EIA data shows a steady increase in natural gas production from 2018 to 2020:
Most of this natural gas production will stem from three different areas: the Appalachian Basin, the Permian Basin, and the Haynesville shale formation. Based on the supply increases from these and other areas, the EIA forecasts natural gas prices will drop by 9% in 2020 when compared to 2019.
Overall, the EIA credits increasing domestic natural gas production to the following advancements:
In their Annual Energy Outlook 2019 report, the EIA modeled the course of several key energy sources over the next 30 years. Of all the energy types, natural gas was slated for the greatest general production increase. To account for a variety of different situations, the models predicted natural gas’s production trends in seven different cases:
For cases one through six, natural gas production is predicted to grow at a higher rate than it is consumed. In case seven, the natural gas production, consumption, and net export rate is predicted to remain relatively flat. A key player in favorable growth is continual technological advances. Since 2005, natural gas production has increased substantially due to hydraulic fracturing and horizontal drilling techniques that improved the process. These improvements, coupled with future improvements, have the potential to optimize natural gas production and prices.
Regardless of the scenario, it is safe to conclude the outlook for natural gas production is positive and reliable. All of this growth contributes to high supply, which could generate consistently low natural gas prices.
To keep natural gas prices low, the U.S. needs to produce more than it consumes. Based on the EIA’s consumption outlook reports, this is likely to be the case. In 2019, daily consumption averaged about 85.3 Bcf/d, and production averaged 92 Bcf/d.
Looking ahead, the EIA predicts the commercial and residential sector will account for 23.2 Bcf/d in 2020, which is about 1% lower than the 2019 consumption rate. The drop stems from the National Oceanic and Atmospheric Administration’s (NOAA) forecasts that detail 1.8% fewer days requiring heat in 2020.
This production-heavy market — with favorable prices — is forecasted to continue until 2021 and in most of the predicted 30-year scenarios.
Commercial energy prices are shifting from moment to moment. Amidst this change, natural gas remains a steady option for low prices and increasing production. As a cleaner-burning and cost-effective fuel, natural gas could be a profitable choice for your business based on its current and future outlook.
Whether you want to learn more about natural gas benefits or need assistance converting your business to natural gas, Shipley Energy is committed to helping you. Our energy experts can help you make an informed decision that benefits your business and takes advantage of the best natural gas prices. To speak with an energy expert, contact us online today.
