For roughly 15 years, from 1985 until 2000, natural gas prices at the wholesale level were very stable, fluctuating around $2.00 per million Btu (MMBtu). In fact, when inflation is considered these prices actually fell in real terms. Since the winter of 2000–01, however, price fluctuations have been dramatic. Wholesale prices reached $10.00 per MMBtu in the winter of 2000–01, retreated to the $2.00 level the following winter, but approached the $10.00 level again in the winter of 2002–03. In 2005, prices rose throughout the summer, spiked sharply to about $15 MMBtu in response to the damage caused by multiple hurricane landings and an early cold winter. Prices, however, have fluctuated in the $4 to $6 range for most of 2006, with ample supplies available in storage. Natural gas prices declined sharply in 2008, and are below $4.00 in early 2009 in response to increased supplies and reduced economic activity.
Volatility at the wholesale level ultimately results in volatility at the retail level. A lack of predictability makes it very difficult for homeowners and businesses to budget and pay for their natural gas service. It also has negative impacts on gas utilities, resulting in unhappy customers, less demand for their service and greater uncollectible accounts. Natural gas utilities do not profit from volatile prices—payments for natural gas ultimately flow back to the producer of the gas, utilities earn a regulated return for shipping the gas. Gas utilities can, and do, ease some of the volatility faced by their customers through practices such as levelized billing, fixed price contracting and hedging of their gas supply portfolio.
The fundamental cause of price volatility is the fact that demand for natural gas can change very rapidly as a result of changes in weather or other key variables. Supply changes, on the other hand, occur more slowly, although the recent increase in supply from shale formations has been relatively rapid.
AGA believes the problem of price volatility is best addressed by increasing the availability of natural gas through greater domestic gas supplies, new sources of domestic gas such as Alaska or currently restricted offshore areas, increased imports of gas from Canada, or from other countries via LNG. The natural gas resource base is abundant, and price volatility can be reduced when access to the resource base is not restricted. State utility commissions are encouraged to support programs proposed by natural gas utilities that would ease the burden of volatility on consumers, such as long-term fixed price contracts, hedging and the construction of new gas supply infrastructure. Congress can ease the burden of higher energy prices on the most vulnerable by increasing funding for LIHEAP.
Additional information: Avoiding the Wild Ride: Ways to Tame Natural Gas Price Volatility (AGA, 2003; www.aga.org)
AGA Contact: Chris McGill, Vice President, Policy Analysis, (202) 824-7134; Bruce McDowell, Director Policy Analysis,(202) 824-7131