Residential Natural Gas Prices

Residential Natural Gas Prices:
Information for Consumers

Introduction

Typically, residential natural gas consumers have a couple of basic questions as the winter approaches: How much will natural gas cost, and will there be enough available this winter heating season?  The answers to these questions will ultimately depend on ever-changing conditions in national and local markets for natural gas.  Since the summer of 2003, market conditions have fostered an upward trend in natural gas prices.  The Energy Information Administration (EIA) expects that these generally higher prices will continue through this winter.

According to its Short-Term Energy Outlook (September 2004), assuming normal winter  weather (and no catastrophic disruptions of supply), EIA believes that supplies of natural gas should be sufficient to satisfy all residential consumers’ needs (although there is always the possibility of isolated shortages due to unusual regional or local conditions).  EIA estimates that the representative average residential price of natural gas will be over 7 percent higher than last winter, while consumption is projected to be almost 9 percent higher this winter.As a result, EIA expects that the total amount paid for gas consumed by the representative residential customer during this winter (October 2004 - March 2005) will only be about 17 percent greater than last winter.

To understand the current high-price environment for natural gas, it is helpful to know  some basics about the commodity itself and the marketplace.

Where Does Your Natural Gas Come From?

Most of the natural gas used in the United States comes from domestic gas production. The remainder comes from imports, primarily from Canada. Domestic gas production and imported gas are generally more than enough to satisfy customer needs during the summer, allowing a portion of supplies to be placed into storage facilities for withdrawal in the winter, when the additional requirements for space heating cause total demand to exceed production and import capabilities.

Natural gas is injected into pipelines every day and transported to millions of consumers all over the country.  Much of it travels long distances from production areas to population centers through interstate pipelines owned and operated by pipeline companies.  Natural gas is actually delivered to residential customers, and other end-use consumers, through the complex network of pipes owned and operated by local distribution companies (LDCs).

What Are Residential Customers Paying For In their Natural Gas Bills?

The price of natural gas consists of three main parts (all cost estimates include a number of taxes):

Transmission costs - to move the gas by pipeline from where it is produced to the customer’s local gas company.

Distribution costs - to bring the gas from your local gas company to your house.

Commodity costs - the cost of the gas itself.

In two of the past two winters (2002-2003 and last winter) the cost of natural gas at the wellhead has comprised 50 percent or more of the residential price. (Figure 1)

Figure 1. Breakdown of Natural Gas Prices Paid by Residential Consumers During the Heating Season

Source: Energy Information Administration, Natural Gas Monthly, May 2003.

This has been the result of unusually high prices for natural gas during these winters, driven by similar market conditions that included weak natural gas production response despite increased drilling levels, colder than normal weather for a number of consecutive weeks during each heating season, declining net imports, and high crude oil prices.

Factors That Affect Natural Gas Prices

There are a number of underlying factors that have prevailed for most of 2004 that have affected prices. Depending on the factor, each has applied either upward or downward pressure on prices. These factors include:

Weak production – although production increased by 0.5 percent in 2003, it was not sufficient to offset the 3 percent decline in production during 2002. The industry in 2003 drilled the second highest number of gas wells in a single year, however production has not increased proportionally.

Falling net imports – net imports fell by around 7 percent in 2003, however they have increased in the first six months of the year compared to 2002 and 2003 in the same time period as both pipeline and liquefied natural gas (LNG) imports expanded in the first two quarters of 2004.

High oil prices – some large-volume customers (primarily industrial consumers and electricity generators) can switch between natural gas and other fuels, such as petroleum products, depending on the prices of each. As a result of this interrelation between fuel markets, when oil prices rise, the competitive pressure to maintain low gas prices diminishes, and the shift in demand to natural gas drives prices upward.

Adequate inventories – based on reports from underground storage facilities through September 24, the net injections of natural gas into storage totaled 3,011 billion cubic feet, 183 billion cubic feet above the 5-year average of 2,828 billion. This left natural gas inventory levels at the end of September about 7 percent above the 5-year average level and about 7 percent higher than last year at this time. The natural gas inventories are expected to track above normal levels through the forecast as long as weather conditions remain close to normal.

How Much Will Natural Gas Cost This Winter?

Each year, EIA projects the average price, consumption, and total cost of natural gas during the upcoming winter for a household in the Midwest. (The Midwest is used because nearly 66 percent of its 29.9 million households heat their homes with natural gas – the highest concentration of any region.) For the heating season of 2004-2005, EIA estimates that Midwest homeowners will pay about  $1.02 per  therm  (1 therm=100,000 Btu, which is the heat content of about 100 cubic feet of gas), or about $10.50 per Mcf, for natural gas this winter  (Table 1).

Table 1. Average Midwest Household Heating With Natural Gas

Mcf =Thousand cubic feet. 1 Mcf=10.30 therms (Based on the national average gas heat content
for gas consumed by other than electric utilities in 2002).
Source: Energy Information Administration, Natural Gas Annual 2002, January 2004.
* Energy Information Administration projections: Short-Term Energy Outlook (September 2004).
Source: All other data: Energy Information Administration, Natural Gas Monthly.

Assuming a return to normal temperatures, this winter will be colder than last winter. This should result in an increase of gas use of almost 9 percent for the representative Midwest residential gas customer. This increased gas use, coupled with the projected price increase of over 7 percent, will result in an increase of about 17 percent in total expenditures for gas by the representative household (Figure 2).

Figure 2. Total U. S. Residential Nautral Gas Expenditures

Source: Energy Information Administtration, Natural Gas monthly, May 2003.

Any forecast is uncertain, and changes to key factors could alter the forecast significantly. Key factors that may affect market prices and consumption regardless of region include:

• A prolonged cold spell or even a brief episode of severe winter weather would increase per-household use of gas and total demand in the high-consumption winter months.
  
  
• Disruptions of the pipeline delivery system would affect deliverability of natural gas.
  
  
• Problems in other energy supplies, such as, prolonged outages of nuclear or coal-fired power plants could increase use of gas-fired generators, thus increasing gas demand.
  

Although increased commodity prices are passed along to consumers, residential bills enjoy some protection from sudden, severe price fluctuations. This is partially because residential bills do not reflect daily market prices but rather the overall cost of an LDC's supply of gas, which depends on the LDC's usually diverse portfolio of supply sources and prices. This translates to a price to the consumer that is much more stable than the often highly variable daily "spot" prices. Also, transmission and distribution services make up a large fraction of residential bills. Further, residential customers have a number of steps they can take to mitigate the impact of commodity price changes.

What Can Residential Customers Do?

To cope with or reduce their gas bills, residential customers can:

• Shop for lower-priced gas, if their state sanctions customer choice programs.  (For information on the status of natural gas residential choice programs in each state, go to: http://www.eia.doe.gov/oil_gas/natural_gas/restructure/restructure.html);
  
  
• Participate in their local gas company's yearly budget plan to spread gas costs evenly throughout the year, thereby lessening the impact of higher prices;
  
  
• Check gas appliances and space-heating equipment for efficient operation;
  
  
• Obtain a home energy audit to identify ways to conserve energy;
  
  
• Reduce thermostat settings, especially when they are not at home.
  

In addition, both Federal and State energy assistance programs are available to natural gas customers who have a limited budget.  For example, the Low Income Home Energy Assistance Program (LIHEAP) is a Federal program that distributes funds to States to help low-income households pay heating bills.  Additional state energy assistance and fuel fund programs may be available to help households pay energy bills during a winter emergency. To find out if you qualify for assistance in your State, contact your State public utility commission or your local gas company.

For More Information . . .

For the latest update on natural gas demand, prices, and inventories, see our Natural Gas Weekly Update page on the EIA web site at:
http://tonto.eia.doe.gov/oog/info/ngw/ngupdate.asp
and the Weekly Natural Gas Storage Report at:
http://tonto.eia.doe.gov/oog/info/ngs/ngs.html

The Energy Information Administration is an independent statistical agency within the U.S. Department of Energy whose sole purpose is to provide reliable and unbiased energy information.

For further information, contact:
National Energy Information Center
Washington, DC 20585
(202) 586-8800
E-Mail: infoctr@eia.doe.gov