Residential Natural Gas Prices:
Information for Consumers
Introduction
Typically, residential natural gas consumers have some
basic questions as the winter approaches: How much will
natural gas cost and will enough be available this winter
heating season? The answers to these questions ultimately
depend on ever-changing conditions in national and local
markets for natural gas. Since the summer of 2003, market
conditions have fostered an upward trend in natural gas
prices. The Energy Information Administration (EIA) expects
that these generally higher prices will continue through
this winter.
According to its Short-Term Energy Outlook (September
2004), assuming normal winter weather (and no catastrophic
disruptions of supply), EIA believes that supplies of natural
gas should be sufficient to satisfy all residential consumers'
needs (although there is always the possibility of isolated
shortages due to unusual regional or localconditions). EIA
estimates that the representative average residential price
of natural gas will be over 7 percent higher than last winter,
while consumption is projected to be almost 9 percent higher
this winter. As a result, EIA expects that the total amount
spent for gas consumed by the representative residential
customer during this winter (October 2004-March 2005) will
be about 17 percent greater than last winter.
To understand the current high-price environment
for natural gas, it is helpful to know some basics about the
commodity itself and the marketplace.
Where Does Your Natural Gas Come From?
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 generally 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 actually
delivered to residential customers, and other end-use consumers,
through the complex network of pipes owned and operated by
local distribution companies (LDCs).
What
Are Residential Customers Paying For in Their Natural Gas
Bills?
The price of natural gas consists of three
main parts (all cost estimates include a number of taxes):
Transmission costs
- to move the gas by pipeline from where it is produced
to the customer=s local gas company.
Distribution costs -
to bring the gas from your local gas company to your house.
Commodity costs
- the cost of the gas itself.
In the past two winters (2002-2003 and last
winter) the cost of natural gas at the wellhead has comprised
50 percent or more of the residential price (Figure 1).
Figure 1. Breakdown of
Natural Gas Prices Paid by Residential Consumers During
the
Heating Season
Source: Energy Information Administration, Natural Gas Monthly,
August 2004
This has been the result of unusually high
prices for natural gas during these winters, driven by similar
market conditions that included weak natural gas production
response despite increased drilling levels, colder than normal
weather for a number of consecutive weeks during each heating
season, declining net imports, and high crude oil prices.
Factors That Affect Natural Gas Prices
There are a number of underlying factors that
have prevailed for most of 2004 that have affected prices.
Depending on the factor, each has applied either upward (![]()
)
or downward (![]()
) pressure on prices.
These factors include:
Weak production -
although production increased by 0.5 percent in 2003, it was
not sufficient to offset the 3 percent
decline in production during 2002. The industry in 2003 drilled
the second highest number of gas wells in a single year, however
production has not increased proportionally.
Falling net imports -
net imports fell by around 7 per cent in 2003, however they
have increased in the first six months of the year compared
to 2002 and 2003 in the same time period as both pipeline
and liquefied natural gas (LNG) imports expanded in the first
two quarters of 2004.
High Oil Prices
- some large-volume customers (primarily industrial
consumers and electricity generators) can switch between natural
gas and other fuels, such as petroleum products, depending
on the prices of each. 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.
Adequate inventories
- Based on reports from underground storage facilities
through September 24, the net injections of natural gas into
storage totaled 3,011 billion cubic feet, 183 billion cubic
feet above the 5-year average of 2,828 billion. This left
natural gas inventory levels at the end of September about
7 percent above the 5-year average level and about 7 percent
higher than last year at this time. The natural gas inventories
are expected to track above normal levels through the forecast
as long as weather conditions remain close to normal.
How Much
Will Natural Gas Cost This Winter?
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 nearly 66 percent of its 29.9 million households heat
their homes with natural gas_the highest concentration of
any region.) For the heating season of 2004-2005, EIA estimates
that Midwest homeowners will pay about $1.02 per therm (1
therm=100,000 Btu, which is the heat content of about 100
cubic feet of gas), or about $10.50 per Mcf, for natural gas
this winter (Table 1).
Table 1. Average Midwest
Household Heating With Natural Gas
Mcf =Thousand cubic feet. 1 Mcf=10.30 therms
(Based on the national average gas heat content
for gas consumed by other than electric utilities in 2002).
Source: Energy Information Administration,
Natural Gas Annual 2002, January 2004.
*Energy Information Administration projections:
Short-Term Energy Outlook (September 2004).
Source: All other data: Energy Information
Administration, Natural Gas Monthly.
Assuming a return to normal temperatures, this
winter will be colder than last winter. This should result
in an increase of gas use of almost 9 percent for the representative
Midwest residential gas customer. This increased gas use,
coupled with the projected price increase of over 7 percent,
will result in an increase of about 17 percent in total expenditures
for gas by the representative household (Figure 2).
Figure 2. Total U.S.
Residential Natural Gas Expenditures
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:
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.
Disruptions of the pipeline
delivery system would affect deliverability of
natural gas.
Problems in other energy
supplies, such as a prolonged outage of a nuclear
or coal-fired power plant could increase useof gas-fired generators,
thus increasing gas demand.
Although increased commodity prices are passed
along to consumers, residential bills 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 LDC's supply of gas, which
depends on the LDC'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 "spot"
prices. Also, transmission and distribution services 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.
What Can
Residential Customers Do?
To cope with or reduce their gas bills, residential
customers can:
Shop for lower-priced gas,
if their state sanctions customer choice programs.(For information
on the status of natural gas residential choice programs in
each state, go to: http://www.eia.doe.gov/oil_gas/natural_gas/restructure/restructure.html)
Participate in their local
gas company's yearly budget plan to spread gas costs evenly
throughout the year, thereby lessening the impact of higher
prices.
Check gas appliances and
space-heating equipment for efficient operation.
Obtain a home energy audit
to identify ways to conserve energy.
Reduce thermostat settings,
especially when they are not at 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.
EIA Web Site:
