Why Have Natural Gas Prices Increased During COVID?
There are many reasons why natural gas prices may fluctuate, and in the U.S. there is a specific set of circumstances that led to a recent spike in oil and gas prices.
So what does this have to do with COVID? In short, it essentially caused an abrupt drop in demand for oil.
Here’s how it all relates.
What causes natural gas prices to fluctuate?
Any factor which affects the cost of production of a natural commodity will drive the cost to consumers up or down.
In the case of natural gas, underground storage levels, drilling costs, and import/export volumes will factor into the price.
The EIA outlines six major factors that affect U.S. natural gas prices.
- Distance from where natural gas is produced or stored
- Availability and capacity of natural gas transmission pipelines
- Volumes and characteristics (such as timing and volatility) of consumer demand
- Costs of distribution, taxes, and other charges
- State regulations
- Availability of competing suppliers
On the cost side — that is, what it costs consumers to use it — prices have to do with distribution cost as well as the way that it is commodified and incentivized.
But prices can also drive demand, and because natural gas prices are to some extent buffered by the availability of stores, this can act as a buffer for dramatic shifts in accordance with seasonal demand.
Weather can also be a factor when it comes to natural gas prices. For instance, cold weather pushes up heating needs, and major events like hurricanes may disrupt oil and gas production.
U.S. Oil Production and Natural Gas Prices
During the early 2000s, the oil prices and natural gas prices roughly mirrored one another, but this stopped around 2009.
Improvements in hydraulic fracturing technologies increased US shale production in 2011. This “shale revolution” transformed the US into the world’s largest oil and gas producer, and for the following 8 years or so, both oil and gas production was high, keeping prices low.
Most shale reservoirs produce both oil and gas, where a U.S. crude production byproduct is natural gas. Gas acquired as a byproduct is called associated gas.
Natural gas can also be found on its own in reservoirs, but it’s more economical to use the gas from oil that is already being drilled.
Associated gas production rose dramatically between 2010 and 2019. Per the EIA, most of the overall growth in US natural gas production was from associated gas.
In April 2020 however, the sudden drop in oil prices caused US oil production to collapse and producers shut down production causing an extremely sharp decline
Natural gas is regional, but oil is global which means that more domestic production will lower the price relative to oil.
So when US oil production drops off, associated natural gas from the US will inevitably follow and prices will typically increase.
Natural Gas Alternatives and Competition
Natural gas is just one of many resources that we use to power our homes and offices, and although alternatives may be used in some settings, generally there’s not a lot in the way of exact substitutes for natural gas.
It is this lack of alternatives and finiteness that make natural gas prices particularly vulnerable.
Industrial players that require large amounts of power may switch between various forms of energy including natural gas, coal, and petroleum, and may switch depending on cost. But this behavior is becoming less commonplace.
If competing fuels have similar price points, competition may push for more production and lower prices.
The increasing availability of renewables like solar may either drive competition in the natural gas sector, or, on the flipside, drive natural gas out of the market.
Saving Money on Energy Bills
It’s important to keep an eye on energy alternatives and economic factors that may drive production, supply, and demand.
This fluctuation is natural so don’t panic if you see natural gas prices rising — chances are that it will drop again.
Fortunately, US households and businesses can still benefit from natural gas power, and there are plenty of ways to reduce your energy costs in your home.
Call us today to learn more about natural gas installation and services.
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