Energy Insights, Part Two: What affects natural gas prices?

Energy Insights, Part Two: What affects natural gas prices?

by Michael S. Payne, JD, LLM

As discussed in Part One of this series, a significant portion of the electricity consumed in the United States is generated by burning natural gas. Low natural gas prices are a significant contributor to today’s historically low electricity prices. Part Two of our Energy Insights series describes factors impacting natural gas prices nationwide. Although market forecasts indicate that natural gas prices should remain low for several years, most industry experts predict continued fluctuations in natural gas prices with a slow steady upward trend. Natural gas prices recently hit a ten-year low.

What affects natural gas prices?

Many of the same factors that drive electricity prices have a significant impact on natural gas prices as well. Disasters, weather, and electricity generation each plays a role in natural gas prices and trends. (See which factors affect electricity prices.)

Disasters. During the last decade, natural gas price swings were dramatic, particularly when hurricanes decreased natural gas production in the Gulf of Mexico. Who can forget the late summer of 2005 when hurricanes Rita and Katrina hit the Gulf, driving gas prices up to an all time high?

Shale production. A significant influence on natural gas prices is how and where gas is located and extracted. Horizontal drilling and hydraulic fracturing are innovative techniques for capturing natural gas in shale formations, including the Barnett Shale in Texas, the Marcellus Shale in Pennsylvania, and the Haynesville Shale in Louisiana. These engineering processes give the United States access to an abundance of shale gas that was previously unrecoverable.  A recent report indicates that at least forty drilling companies are currently leasing land in Pennsylvania, where more than 2,400 wells were drilled between 2006 and 2011 in the Marcellus Shale region.

Enough natural gas is in the Marcellus Shale to fully meet the natural gas demand for the entire United States for many years, perhaps 50 years or more. While estimates vary widely, the U.S. Energy Information Administration (EIA) reports that the Marcellus Shale contains approximalty141 trillion cubic feet of gas. Many industry experts track the shale gas market and provide evaluations, but pinpointing specific predictions is challenging. Much of the Marcellus Shale, which is thousands of feet below the earth’s surface, remains untested for long term productivity. As fracking continues, more information will be revealed about accessibility and environmental consequences. Forecasts will evolve as these factors come into play.

Shale gas production is a primary reason for the significant steady decline in natural gas prices during the past two years. (See how to benefit from historically low energy prices.) However; as prices decline, so does the number of active drilling rigs in the Gulf of Mexico and other traditional production areas.  

Storage. An immense amount of natural gas is in storage. The EIA reports that inventories are likely to reach four trillion cubic feet, which is just short of capacity, by October 2012. The amount of natural gas in storage today is the highest since 1983.

Electricity generation. An increasing number of coal-burning power plants are switching to natural gas for generating electricity. In the last decade, use of natural gas to generate electricity increased 50 percent. The EIA reports that between 2009 and 2010 natural gas use for electricity generation increased 24% in North Carolina, 18% in Virginia, and 15% in South Carolina. Experts predict that 49% of electricity will be generated by shale gas by 2035. Wind, solar, and other “green” resources are increasingly used to create electricity, but are not able to generate enough electrons to make a significant contribution to supply. And, those resources are less attractive on a relative cost basis while natural gas prices are low. The fewer available alternatives, the greater the pressure to push prices higher.

Demand. Today, demand for natural gas is increasing worldwide, not just in the United States. Federal permits are in place to provide for the extraction and delivery of three trillion cubic feet per year of natural gas to export markets. By 2016, the United States will most likely become a net exporter of liquefied natural gas. As domestic and worldwide demand increases, so could prices.

Overall, the remarkable dip in natural gas pricing from nearly $13/mmBtu in 2005 to $2/mmBtu in 2012 has caught the attention of consumers, investors, academia, politicians, energy companies, and government agencies. Natural gas prices have not been as low as they are today since January 2002, making now an excellent buying opportunity for consumers.

About the author

Michael S. Payne, JD, LLM, is Executive Vice President & Corporate Counsel of Affiliated Power Purchasers International LLC (APPI Energy). More than 140 affinity groups endorse APPI Energy because of its 16-year proven track record of reducing and managing electricity and natural gas costs for 3,300 clients with locations across the U.S. Contact the team of energy experts you can trust at 800-520-6685.