6 Factors Affecting Natural Gas Prices (And 1 That’s Raising Them Now)
Impact of Weather
Image via Flickr via Mike Mozart
Seasonal weather, including tropical storms and hurricanes, can have a great influence on natural gas production. This supply side factor forces refineries to slow or shut down production during periods when weather events pose a threat to workers and facilities.
Hurricane activity along the Gulf Coast in the mid-2000s forced natural gas companies to halt domestic operations in the area for close to a year (from summer 2005 through summer 2006). The resulting slowdown cost the country four percent of its normal total natural gas output over that period.
Weather that impacts travel, including blizzards and tornadoes, can also affect pricing due to artificial scarcity caused by delayed deliveries of natural gas. Milder temperatures during seasons of traditionally higher natural gas usage — fall and winter — can mean lower prices because consumers use their home heating systems less. Hot weather during the summer can jump-start natural prices because 30 percent of power plants in the United States use natural gas to generate electricity. When more homeowners turn their air conditioners on, natural gas prices could go up.
As the economy grows, so does the price of natural gas. In a strong economy that shows good growth, particularly in industrial and commercial markets, demand for this resource spikes. Companies experience an increase in demand for their goods and services, which in turn raises the want level on natural gas as a power source. As more economic sectors demand natural gas, the price invariably increases. A variety of industries use natural gas that consumers may not realize.
Pharmaceutical companies use butane, ethane, and propane to make a myriad of consumer health products. Industrial companies use natural gas to make cleaner-burning fuel sources, including gasoline (methanol). It also has a use in the farming industry as a part in fertilizer. Heating and cooling systems — particularly infrared heating units used by the metals industry — in commercial areas also use natural gas. These devices give an environmentally friendly and efficient means to heat and cool water and other materials.
Competition Among Resources
Use of natural resources among energy companies and industrial operations changes regularly depending on availability and price. Typically, these companies look to leverage the cheapest natural fuel source to control their own production cost. Because of the inter-related nature of fuel markets — oil, natural gas, and coal — swings in interest to any one of them drives down the price for the others. For example, a shift by electricity companies to coal usually lowers the demand for natural gas and oil. As demand falls, so does price. Because of large volume associated with natural resource consumption, even a small decrease or increase in price can have a noticeable effect on demand.
As of 2013, utility companies in the United States use natural gas to generate 27 percent of all electricity used by homes and businesses alike. Coal, as of the same year, still generates a higher percentage of total electricity in the nation at 39 percent. The use of natural gas by power companies, however, is on the rise. This trend is occurring, in part, because of the fuel’s low-carbon footprint and its domestic availability — most notably in the Marcellus Formation.
Crude Oil Price Fluctuations
Crude oil prices can influence the use and price of natural gas in ways that coal or other home heating oils do not. When the price per barrel of crude oil rises, so does the cost of the products manufacturers and refineries produce from it, including gasoline. When gasoline prices increase, consumers adjust their travel plans and buying strategies. They may go on fewer vacations, take shorter trips, and spend less when they do.
Businesses that use petroleum products may also cut back on gasoline usage to control overhead. Natural gas is an attractive alternative as many machines that run on petroleum can also use natural gas.
Natural gas occurs in two varieties: associated and non-associated gas. Crude oil refineries extract dissolved associated natural gas from crude oil as a byproduct of the purification process. An increase in demand for crude oil can increase the cost of production, which increases the price for crude oil as well as natural gas refined along with it. Increased drilling to find new sources of crude oil can also drive up the cost, which influences the price of associated natural gas.
Natural Gas Storage
The cost of maintaining storage facilities for natural gas can influence its end price for the consumer. Known as storage levels, these underground field locations are a key link in the supply chain for delivering natural gas to utility companies, businesses, and homes throughout the year. An uptick in fees associated with storage levels can cause a corresponding increase in natural gas prices. Supply and demand also influences storage needs. A lower demand for natural gas means more time in storage, which causes costs associated with maintaining storage levels to rise.
Now: Natural Gas Supply
Reserves of natural gas kept in storage levels across the United States have the greatest current influence over natural gas prices. Without adequate reserves to meet demand during peak usage months, increased scarcity spurs natural gas companies to push production to refine more usable gas.
As production rises higher, associated resource costs, including worker wages, machinery upkeep, and fuel, increase, as well. Consumers and businesses feel the effects in the form of higher natural gas prices. Natural gas proved reserves fell by 7 percent in the United States by 7 in 2012 on the back of low prices. In 2013, the price of natural gas per MMBtu (British Thermal Unit) shot up to over $3.60.
As the competition among industrial companies to find the most cost-effective fuel increases, so does the interest in natural gas as a long-term solution. How the United States manages its natural gas reserves will tell the true story of whether businesses can adopt this strategy or leave it for cheaper alternatives.