Natural gas costs also rise

A price spike in new fuel of choice may mean higher heating bills for

First crude-oil prices started to go up. Then gasoline prices hit consumers in the pocketbook. Now it's natural gas's turn.

Over the past three weeks, the price of the clean-burning fuel has spiked 33 percent. Since February, the price has doubled to the highest level in two years.

Now, as summer ends, consumers are watching if the higher prices hold as the heating season nears.

"The potential implications could be great," says Ellen Berman, president of the Consumer Energy Council of America Research Foundation in Washington.

Some 55 million residential customers and another 5 million businesses use natural gas. Almost 70 percent of new homes use this fuel for heating. It has become the fuel of choice for many new power plants since it makes it easier to get environmental permits. And in Washington, the Clinton administration is viewed as "pro natural gas."

As a result, natural-gas use is growing at about 3 percent per year - one of the fastest rates of growth for a hydrocarbon.

Higher energy bills?

Energy analysts don't expect to see the higher prices pop up immediately in consumers' bills. Many gas companies have been buying less expensive gas all summer and storing it, and others have long-term contracts with producers at fixed prices. Some companies even buy slightly less expensive gas from Canada.

But even if prices hold steady for now, says Jim Todaro, an analyst with the Energy Information Administration, "eventually the consumer would end up paying."

Despite the higher prices, the natural-gas industry is confident it will have enough supplies for the winter. "There is no question there is more than enough natural gas," says John Sharp of the Natural Gas Supply Association.

If that's the case, then why is the price shooting up?

Mr. Sharp says part of the reason is a reduction in oil production - a long term trend in the US. Natural gas is often found in conjunction with oil. Oil exploration slowed when the price of oil was hovering at the $12- to $14-per-barrel level. Now, oil is back over $20 per barrel. But it takes at least a year to drill new wells and bring them on stream.

"Where there is a shortage, people seem to find the gas," says Sharp.

Gas prices are also on the rise because of general increases in crude-oil prices. As oil prices rise, large buyers of energy shift to less expensive fuels.

Oil prices are on the rise as a result of the reduction in oil supply from the OPEC producers and a slight increase in worldwide demand as the economies in Japan and Europe perk up.

Mr. Todaro says some of the strength in natural-gas prices is seasonal, as large utilities fill their storage in anticipation of the winter. Typically, natural-gas prices peak in October and November.

The higher prices may be keeping buyers from restocking their inventories. Natural-gas storage is slightly below last year's pace. Chris McGill, director of gas supply and transportation at the American Gas Association, thinks buyers are hoping the price will fall.

"It's entirely possible the gas-supply planners missed the boat and will have to pay more for the gas now than they would have in May," he says. "That can happen any year."

One reason gas buyers might be reticent is because of the warm winters of the past three years. "With the mild winters, a lot of people have had a lot of gas on hand at the end of the winter," says Mr. McGill.

The danger of not having the gas, however, can be seen in the winter of 1995-'96, when a long cold snap sent gas companies scrambling. They ultimately bid the price up to $14 per million cubic feet (mcf). Today, gas sells at around $3 per mcf.

Other cost factors

For consumers, the rising gas prices are only part of their gas bills. Brooklyn Union Gas (BUG) in New York estimates that gas accounts for only 35 percent of a customer's final bill. Over 50 percent of the bill is the cost of transporting the fuel to the customer.

"We're always looking for ways to mitigate higher prices," says Bill Kinneary, a vice president at Key Span Energy Services, a retail gas marketer owned by the parent of BUG.

For Key Span this has meant buying gas from Canada, where it is somewhat less expensive, and using the futures markets to hedge against price rises. As a result, it is offering new gas users two-year, fixed-rate contracts. Mr. Kinneary says most customers take this option.

Industry mantra: 'low costs'

Holding costs down has become a mantra of many gas utilities because of deregulation. At Michigan Consolidated Gas, the utility agreed to freeze prices at $2.95 mcf through December 2001.

The company is doing this as an incentive to keep its customers and to maintain a level playing field for its competition. So far, only 6 percent have gone to another supplier.

Most gas customers in the nation, however, won't have the benefit of a price freeze this winter. For that reason, says Todaro, "What's going on in the markets bears watching."

(c) Copyright 1999. The Christian Science Publishing Society