Despite successful efforts to refill natural gas storage, high pricing and volatility have reappeared in much of the United States. It may be time to admit that the rules have changed, and for endusers to begin adapting to a new level of pricing uncertainty.

In July 2003, this column warned about an impending gas crunch due to low levels of stored natural gas, and suggested actions by large users, especially those taking firm (as vs. interruptible) gas service. Over the next six months, the gas industry refilled storage faster than many thought possible, reaching relatively normal storage levels. Many thought that was sufficient to avoid a repeat of last year's huge price spikes.

By January 2004, gas prices in many areas had once again reached nasty levels, despite the storage effort. While another major cold snap is largely responsible for the astonishing pricing seen in the Northeast (up to $70/MBtu), base prices are also high. Some analysts are now complaining that the market "is not following fundamentals, and prices should come crashing down again." But what if the fundamentals (e.g., response to weather, demand, supply) have changed, and old rules no longer work?

New Findings Indicate Major Shifts

In late September 2003, the National Petroleum Council (an advisory group to the U.S. Secretary of Energy) reviewed its study, "Balancing Natural Gas Policy - Fueling the Demands of a Growing Economy." Available online at, this analysis provides basis for a belief that the rules have changed and actions are needed. NPC concluded that:

"There has been a fundamental shift in the natural gas supply/demand balance that has resulted in higher prices and volatility in recent years. This situation is expected to continue, but can be moderated."

NPC sees the basic problem as a long-term conflict between supply policies (which have restricted finding new gas domestic gas capacity) and demand policies (which have pushed for greater use of gas as a clean fuel for power plants and industrial facilities). Among its findings are some that suggest refilling storage to last year's level is no longer sufficient.

  • Over the past five years, opening many new gas-fired power plants has resulted in more gas being used to make power than is used to heat homes.
  • Despite a significant jump in the number of working drill rigs (usually a precursor to increased supplies), very little new supply has occurred.
  • Output from Canadian gas fields (which had picked up the slack when U.S. fields began to weaken) is dropping faster than expected.
  • Accessing new U.S. gas resources (e.g., offshore on the Continental Shelf) is becoming tougher and more expensive.
  • Dual-fuel usage (big in the '70s and '80s as a way to access lower pricing and avoid service interruptions) has dropped sharply.

NPC saw two possible paths out of this situation: a reactive path or a balanced future. The former sidesteps the basic conflict but calls for better gas use efficiency, new U.S. resources, expanded distribution systems, eases restrictions on other fuels (such as coal), and seeks greater imports of liquified natural gas (LNG) through new port terminals. The balanced future addresses the conflict by also focusing on greater demand flexibility and efficiency (including fuel switching), more supply diversity (such as LNG), improving gas infrastructure (e.g., pipelines, storage), and promoting efficiency of markets (which, among other things, means exposing end users to price volatility).

NPC's chart of the price impact of these policies shows the reactive path raising gas pricing from the present (roughly) $4.50/MBtu to up to about $6.25 (about 35%) by 2010. At best, a balanced future could drop it as low as $3.75 (all in 2002 dollars) by the same date. NPC concludes that following its balanced future could "save energy consumers as much as $1 trillion in natural gas costs over the next two decades."

Not A Bright Future

While Energy Secretary Spencer Abraham heard NPC's report and suggestions, it is unclear what impact it will have. Failure of the national energy bill in Congress in late 2003 made it more difficult to reach a consensus on just what is needed. A balanced future therefore seems unlikely, and there is no reason to believe that even the reactive path will occur by default. When was the last time you heard, for example, of major gas efficiency incentive programs being funded by your utility or state? And where are the crowds welcoming LNG gas terminals (always a good target for terrorists) into their neighborhoods?

Endusers need to be looking for ways to address their natural gas pricing and usage without waiting for action at the national level. ES