Wholesale natural gas prices, now at $5.20 MMBtu, are nearly triple what they were 18 months ago. This pronounced run-up in prices will translate into significantly higher heating bills this winter. If the milder-than-average pattern of winter temperatures continues for another cycle, heating bills will go up by 25% to 50%. Should Wisconsin experience a colder than average winter, households could wind up paying $150 to $250 more for natural gas service this winter than they did during the 1999-2000 heating season.
Why are natural gas prices rising? The simple answer is that supplies have not kept pace with demand, and gas storage inventories are tracking well below historic levels as the winter approaches. One respected energy research service, Simmons & Company International, suggests that an outbreak of cold weather in late February or March is likely to test the ability of the system to meet peak demand. Looking ahead, Simmons predicts storage inventories to be even lower going into next year's winter. In other words, the higher bills we will pay this winter will be a preview of coming attractions.
Natural gas extraction in the Lower 48 states has remained flat over the last four years while demand has increased. Given the anticipated growth in gas-fired power generation capacity in the next five years, the expectation that prices will continue to climb is a realistic one, notwithstanding a significant upsurge in drilling activity in North America.
With growth in demand a given, why is it proving so difficult to increase North American natural gas supplies? The simple answer is that the older lower-cost natural gas fields are now in decline, and that until recently, the price of natural gas was too low to justify higher extraction rates and exploration activity. While there are significant quantities of natural gas available for extraction, these fields tend to be "tighter and deeper," and will require higher prices to justify their extraction. The situation is not unlike raising the speed of a treadmill: the industry has to move faster just to remain in place.
Today's New York Times reports that energy companies, pipeline operators and Indian tribes expect to announce plans next spring for building several pipelines to tap into large natural gas fields in Arctic North America. This is a significant development, as energy companies do not make plans to spend $10 billion or more lightly. What this announcement suggests is that the energy industry recognizes that the contribution from established sources of natural gas will continue to dwindle, and that conservation and fuel-switching strategies are not likely to alter the supply-demand picture.
While the outlook for lower natural gas prices is distinctly unpromising, Wisconsin is better prepared than most states to deal with this situation. That is because Wisconsin lawmakers had the foresight to support the Public Benefits provisions in Reliability 2000, enacted as a part of the current state budget. In contrast to most states, Wisconsin strengthened its commitment to programs and financing that will enable households, businesses, schools and local governments to reduce their energy consumption, resulting in lower bills. Whether the strategies employed involve more efficient appliances and heating/ventilation equipment, or the use of solar and other renewable energy applications to provide heat or electricity, these options will become more affordable as a result of Public Benefits programs. It should be noted, however, that the effectiveness of these programs depends heavily on public awareness. The more Wisconsin citizens learn of these programs, the more they will take advantage of their potential to deliver lower bills and a more secure energy future.
"Crude Oil and Natural Gas Price Forecasts 2001 Moving Higher," Simmons & Company International, September 14, 2000.
Web address: simmonsco-intl.com/research/default.asp
"A Big Push Is On For Natural Gas Under The Arctic," by James Brooke. The New York Times, September 28, 2000.
Petroleum and Natural Gas Watch is a RENEW Wisconsin initiative tracking the supply-demand equation for these imported fuels, and analyzing its effects on prices, consumption levels, and the development of energy conservation strategies and renewable energy alternatives.
For more information on the global and national petroleum and natural gas supply picture, visit "The End of Cheap Oil" section in RENEW Wisconsin's web site: www.renewwisconsin.org
