Q: How many homes are heated with natural gas?

A: Natural gas is America’s most popular home-heating fuel – heating more households than all other energy forms combined. In all, 52 percent of all heated U.S. households have natural gas heat. Of the remainder, 31 percent heat with electricity, 9 percent use fuel oil, 6 percent use propane and 2 percent use wood, kerosene or other fuels.

WINTER OUTLOOK

Q: What is the outlook for natural gas prices this winter?

A: Natural gas customers may face significantly higher energy bills this winter – especially if winter weather is colder than it was last year. In a preliminary estimate released on Sept. 7 in its “Short-Term Energy Outlook,” the U.S. Energy Information Administration (EIA) indicated that an average natural gas home-heat customer could expect to pay as much as 47 percent more for natural gas service during the winter of 2005-2006 (October 2005 through March 2006) than last winter, due in part to the impact of Hurricane Katrina on natural gas production facilities in the Gulf of Mexico. Customers in some Midwestern states (Illinois, Indiana, Michigan, Ohio and Wisconsin) could see even higher bills, EIA said.

Consumers who heat with other fuels will likely pay more this winter, as well, EIA said: Northeast heating oil bills up 31 percent, propane bills up 40 percent and electric heating bills up 17 percent.

WHY IS THIS HAPPENING?

Q: The nation’s 68 million natural gas customers have ridden a roller coaster of price swings in recent years. What’s happening?

A: Natural gas is increasingly popular for use by homeowners, schools, businesses, factories and electric power-generation plants because it is efficient, clean, and reliable. However, natural gas production has struggled to keep pace with demand. As a result, the market price of natural gas reflects an extremely tight balance between natural gas supply and demand.

The wholesale price of natural gas was relatively stable during the 1990s – around $2 per thousand cubic feet (Mcf) – because natural gas supplies were in balance with demand. Since 2000, however, wholesale natural gas prices have risen and could average nearly $9 in 2005 due to a number of factors, according to the U.S. Energy Information Administration. Factors that have resulted in higher natural gas prices include increased use of natural gas to generate electricity, especially during this summer’s warmer-than-normal weather, disruptions to natural gas production caused by Hurricane Katrina and public policies that have made it increasingly difficult for energy producers to keep up with consumer demand.

Natural Gas Spot Prices Have Risen and Fluctuated Since 1990’s (prices in dollars per thousand cubic feet, based on spot price at the Henry Hub)
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, September 2005

WEATHER IS THE BIGGEST VARIABLE IN NATURAL GAS BILLS

Q: What impact does weather have on natural gas prices?

A: Weather is often the biggest factor in how much residential customers pay for natural gas during the winter. Natural gas prices remain quite sensitive to weather, for three main reasons:

1. Heating demand: The weather is a major factor in how much energy people use to heat their homes. If it’s colder, people tend to use more energy. So even if the wholesale price of energy stays the same from one winter to the next, consumers will receive higher bills if they consume more energy than they did the year before.
2. Cooling demand: An increasing amount of natural gas is being used to generate electricity. Many of the newer “peaker” power plants that generate extra electricity during periods of peak demand – such as during summer heat waves -- run on natural gas.
3. Natural gas production: As we saw during Hurricane Katrina, major weather events can disrupt natural gas production in the Gulf of Mexico. Initially, Hurricane Katrina reduced natural gas supplies by an estimated 8.8 billion cubic feet per day.

PRICE VOLATILITY

Q: What steps are utilities taking to manage natural gas price volatility?

A: Utilities want what their customers want: an ample supply of natural gas at affordable prices. And consumers love natural gas – but they do not like surprises. So natural gas utilities take a number of actions to stabilize natural gas prices and help consumers deal with fluctuations in their energy bills:

• Billing plans – Most utilities offer balanced-billing plans that allow customers to spread their natural gas costs over many months, which makes it easier for people to handle winter heating bills.
• Storage – Many natural gas utilities purchase natural gas during warm-weather months, and store it for use on cold winter days. Many utilities use underground storage areas (such as salt caverns or depleted aquifers), while some others (including those in New England, where the geology is different) use above-ground tanks that store natural gas in a super-chilled, condensed form known as liquefied natural gas. About 15-20 percent of the total natural gas consumed during the winter comes from storage, but storage can account for half of some utilities’ natural gas supplies on winter’s coldest days – contributing to reliable service. In addition, storage is often a way to hedge against potential run-ups of prices on winters’ coldest days: instead of purchasing gas supplies on the daily winter spot market when prices can be high, utilities may purchase some gas for storage at lower cost during the summer and pass those savings on to customers.
• Hedging – More than half of the states allow utilities to use financial tools such as futures contracts and weather risk insurance to stabilize natural gas prices. Prior to 1995, few natural gas utilities used such financial tools. By the 2004-2005 winter heating season, 70 percent of the gas utilities surveyed by the American Gas Association used financial instruments to hedge at least a part of their gas supplies.
• Contract terms – Just as homeowners shop around for food and household items, gas supply managers obtain their gas supplies from a variety of sources and under different contract terms.

THE MAIN SOLUTION

Q: How do you bring natural gas prices down?

A: You can reduce demand, increase supplies or do both. With U.S. demand for natural gas projected to increase nearly 40 percent by 2020, reductions in demand (through energy efficiency and fuel-switching) are vital to helping to ease prices, but it is clear that natural gas supplies must increase. It is in consumers’ best interest to do so. During the 1990s, consumers enjoyed natural gas at affordable prices because available supplies of natural gas were greater than even peak demand. Supply and demand are now in a very tight balance, and changes in the weather or economic activity have an almost immediate impact on the wholesale price of natural gas. More supply = lower, more stable prices.

Q: Congress passed a major energy law in 2005 that will help to spur additional natural gas production while also promoting energy efficiency and a more diverse mix of fuels to generate electric power. How soon will consumers expect to see lower energy prices as a result of the new law?

A: It won’t be immediate. If you decide to widen an interstate highway today, it won’t be completed tomorrow. Similarly, energy projects take time to plan and put into place.

ECONOMIC IMPACT

Q: What is the impact of natural gas price fluctuations on the U.S. economy?

A: Energy is the lifeblood of our economy, and natural gas meets one-fourth of the United States’ total energy needs. Natural gas is the backbone of American manufacturing, used to make steel, glass, chemicals, textiles, automobiles, food and many other products. Higher natural gas prices put America at a competitive disadvantage, since natural gas costs less in many countries.

PRODUCTION TRENDS

Q: Why is it so hard for natural gas producers to keep up with demand?

A: The thousands of companies that produce natural gas in the U.S. face some stiff challenges:

• Many wells that have produced abundant natural gas for years are becoming depleted. The number of producing gas wells has tripled since 1971 (from approximately 100,000 to more than 300,000) but production has declined – a clear indication that many existing natural gas basins are maturing.
• It is sometimes difficult and more costly to pull natural gas from mature producing areas. That’s why it is important for producers to be able to move to fresh supply areas, and use the best technologies to find and produce more natural gas.
• Even when producers hold valid leases, they often face months of delays and red tape when getting federal or states permits to start working on bringing energy supplies to consumers.

SHORT-TERM OPTIONS

Q: What can be done to alleviate the price crunch?

A: Options are pretty limited for the next few years. Efforts that can be taken in the short-term include:

1. Use energy more efficiently – Encouraging natural gas customers to use energy more efficiently can help, too. Before the winter, residential consumers can take steps such as replacing older furnaces with more efficient models, insulating or replacing windows, installing programmable thermostats or adding insulation. While efficiency alone can help, it cannot solve the problem on its own. Additional natural gas must be produced to keep up with significant increases in consumer demand.
2. Expand low-income energy assistance – In anticipation higher winter heating bills, Congress should increase funding for the Low-Income Home Energy Assistance Program (LIHEAP). At its current ($2 billion) funding level, LIHEAP assists only one of every five eligible households. Most LIHEAP beneficiaries do not receive welfare or other forms of public assistance. Instead, they are typically working, retired or disabled persons with below-poverty income who receive $200 per year, on average, to pay toward a natural gas, fuel oil or electricity bill that averages $1,000. More than half of LIHEAP beneficiaries use natural gas heat.
3. Increase natural gas supplies: – Even a marginal increase in natural gas supplies could help dampen price increases. One of the best short-term options is to increase imports of liquefied natural gas (LNG). Currently, LNG meets a small (3 percent) but important part of U.S. natural gas needs. Licensing and building more import terminals is vital during the next few years. In the meantime, policy-makers should take steps to enable production companies to increase production from traditional and non-traditional natural gas supply areas.

LONG-TERM SOLUTIONS

Q: What long-term steps can be taken to ensure that natural gas supplies are there when customers need them?

A: Elected officials at the state and federal levels must continue to pass laws and regulations that align proper stewardship of the United States’ abundant natural gas supplies with the increasing consumer demand for energy. One important action that Congress took in October 2004 was voting to encourage construction of a pipeline to bring natural gas from Alaska’s North Slope to customers in the lower-48 states. Alaskan officials anticipate that the pipeline will not be in place and transporting natural gas until at least 2018.

In the meantime, additional steps that can and should be taken include:

• Reassessing current restrictions on energy production on federal land and water areas, in light of growing natural gas demand as well as innovations in exploration and production technology.
• Increase funding for the federal Low-Income Home Energy Assistance Program.
• Provide tax incentives for use of innovative, energy-efficient natural gas technologies.