Natural gas prices hit record

Natural gas prices hit record

By Joe Baker

By Joe Baker

Senior Editor

Natural gas prices reached record highs Monday in the midst of a blizzard which raked parts of the Midwest. Very cold temperatures are expected for the next few days.

Analysts said prices jumped as much as 13 percent, hitting a peak of $9.65 per 1,000 cubic feet in trading on the New York Mercantile Exchange. The higher costs are expected to appear on customers’ heat bills almost immediately.

In Chicago, Phil Flynn, vice president and senior energy analyst at Alaron Trading Corp., said the blizzard that brought Chicago a foot or more of snow, boosted fears utility companies might not have enough gas stored to get through the winter.

Flynn said cold weather in the Pacific Northwest also contributed to the price hike.

“It’s more of a psychological situation than a real situation right now,” Flynn said. “I would expect that the first big break in the weather will bring a break in the market.”

Natural gas is used year-round to generate electricity for air conditioners and computers and other power consumables. That increased useage has not had equal growth in capacity, so supplies are tighter.

According to the American Gas Association, several factors have affected the price of natural gas in the marketplace. One factor, of course, is production. In 1998 and into 1999, low prices at the wellhead led to a drop in the number of rigs drilling for gas, the association said. Now, that has reversed, and there are many more rigs operating. That will produce a price response, but not this year.

Another factor is underground storage. Storage levels are running about 7 percent behind last year, AGA said, but are only a little lower than this time last year. They are expected to return to normal levels soon.

A third factor, AGA said, is natural gas imports. Imports from Canada have grown 130 percent in the last 10 years. They amount to about 13 percent of U.S. consumption. They are expected to keep growing.

Another, and very important factor, is demand. In the last decade, demand has increased in all sectors at a rate of 2.8 percent annually, AGA said. Some 40 percent of U.S. gas consumption goes to factories and other industrial customers. That pushes the demand. About 15 percent of useage goes to generate electricity, but this is a faster growing component of demand. High oil prices have kept many factories and power producers from switching from gas to oil.

The association said weather is a key variable in prices. The AGA said a return to normal winter weather—even if prices were unchanged from levels last year—would result in higher bills. If higher prices combine with higher consumption because of colder weather, total bills will rise sharply.

The AGA said most natural gas utilities add no profit to the cost for each unit of natural gas. It said the cost of gas makes up about one-third to one-half a residential customer’s bill. The remainder goes for transmission and distribution of gas, system maintenance, safety and inspection programs, metering, billing, customer service, and other costs.

Some states’ gas costs are averaged over a heating season or over a year, and passed on to consumers as an average cost. In that way, any price spikes are somewhat eased.

The AGA warned consumers should not try to estimate their monthly gas charge based on daily shifts in the price of natural gas. These prices are not accurate in reflecting average costs because utilities buy only a portion of their gas supplies in the daily market. AGA said these supplies are bought on contract, and some prices in these agreements vary, while others are fixed.

Some 87 percent of the natural gas used in the United States is produced in this country, the association said. The remainder comes from Canada.

AGA said working gas in storage topped the five-year average for 10 of the first 15 weeks this year. Despite a drop in total supplies, the association said the shortfall is rapidly being replaced. The AGA said weather and economic decisions will decide if additional gas is put into storage before the heating season ends.

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