Natural Gas Supply and Price Fact Sheet

The recent increase in natural gas prices — coupled with the testimony of Federal Reserve Board chairman Alan Greenspan before the Senate Energy & Natural Resources Committee — has raised concerns about the long-term pricing and competitiveness of natural gas. Proponents of gasoline and diesel vehicles have attempted to use this situation to dissuade fleet owners and operators from switching to natural gas vehicles (NGVs). The truth is that, while prices have increased over the past few years, the U.S. has access to adequate amounts of natural gas for the near-, mid- and long-term, and the price of that gas for vehicle use will continue to be less than for petroleum products. The following are answers to frequently asked questions about natural gas price and supply:

• How volatile have natural gas prices been over the years?
  For over 20 years, natural gas prices have been extraordinarily stable – especially when compared to the price of petroleum. Since the early 1980s, shortly after the field price was deregulated by the federal government for many categories of natural gas, the available supply exceeded the market demand. This was referred to as the "gas bubble." As a result, gas prices remained artificially low and stable. In fact, the price at the wellhead for natural gas in 2002 was 22 percent less in real terms than it was in 1985.
  
  
• Why have natural gas prices increased so dramatically recently?
  The artificially low natural gas prices caused by the historic "gas bubble" had two effects. First, more customers in all markets – including residential, commercial, industrial, and power generation – had an economic incentive to use more. Second, gas producers did not have an economic incentive to find more. The net impact of these two trends is that, today, the gas bubble is gone and natural gas supply and demand are roughly in balance. Like all such balanced situations under a market-driven system, an unexpected change in supply or demand will cause a rapid shift in price. That is what has occurred in the natural gas market.
  
  
• What are the specific causes of the current natural gas price shift?
  There are several. First, the past two winters were especially cold. As a result, the amount of natural gas used increased sharply. More importantly, the amount of natural gas drawn out of the storage systems of the nation’s natural gas utilities was far more than anticipated.
  
  Second, natural gas utilities are winter-peaking, i.e., the demand for gas from utilities is greatest during the winter season. Historically, gas utility regulation encouraged utilities to maintain relatively high levels of storage to serve their winter peak. That has changed. In general, gas utilities today have an economic incentive to keep storage levels as low as possible, i.e., just adequate enough to serve their forecasted winter demand. The combination of relatively low 2002 storage levels and the cold winter left gas utility storage at historically low levels. In the spring and early summer of 2003, utilities were competing in the market to buy gas to replenish their reserves for the 2003-2004 winter heating season. That aggressive purchasing contributed to upward pressure on gas prices.
  
  Third, natural gas has become the fuel of choice for electricity generation due to its low cost and significant environmental benefits. There also have been regulatory and other obstacles to building electricity plants operating on other, often dirtier, fuels. As a result, natural gas use for electricity generation has grown dramatically. Electricity plants tend to be summer peaking to serve the growing air conditioning market. In the past, the price of gas in the summer was much lower than in the winter. However, as a result of this growing summer demand, seasonal pricing has changed. Electricity plant operators are now competing with gas utilities for the same gas supply during the summer -- thereby putting even more upward pressure on gas prices.
  
  
• What is happening to increase the short-term supply of natural gas?
  Gas producers have been responding to the sharp rise in gas prices by significantly expanding their gas exploration and production activities. The number of exploration and production rigs in operation today is significantly greater than just two years ago, and the number of well completions has increased.
  
  
• Won’t natural gas use in power generation and other high volume applications continue to grow significantly?
  No. Many high volume applications, such as fertilizer plants, petro-chemical production and power-plants are particularly sensitive to fuel prices. As natural gas prices have risen, these applications have cut back significantly on their gas use.
  
  Currently, there is overcapacity of electricity generation in the U.S. Plants that do not operate do not use much fuel. In fact, some new, efficient gas power generation facilities are replacing older, less efficient gas facilities. This, in part, has led to a dramatic decline in the number of gas-fired power plants being planned. For example, GE Power Systems expects to ship only a tenth as many combined-cycle power units in 2004 as it did in 2003. Meanwhile, the federal government is aggressively supporting new clean-coal technologies. With natural gas prices moving to levels sufficient to ensure necessary exploration and production investment, clean-coal power plants are becoming far more cost-competitive. A leading electricity industry analysis firm recently stated that "it is clear that the [gas-fired electricity plant] construction boom is finally nearing its end." To underscore that point, today 94 coal-fired power-plants are in some stages of planning in the U.S.
  
  
• Is the price of natural gas for vehicles competitive with gasoline and diesel fuel?
  Yes, better than competitive. Most discussions of natural gas prices in the media refer to the field or wellhead price of gas quoted in dollars-per-thousand-cubic-feet (mcf). An mcf contains the energy equivalent of eight gasoline gallons. Therefore, uncompressed natural gas at $6.00 per mcf is the equivalent of gasoline at only 76 cents per gallon.
  
  Clearly, the cost to the NGV customer is substantially greater than that price since compressed natural gas at the dispenser includes the cost of transporting the gas from where it is produced to the fueling station, the cost of compressing the gas into the vehicle, taxes, etc. On average, the cost of the gas itself comprises only about 30-50 percent of the cost the NGV customer sees at the pump. Therefore, even if natural gas prices were to double, the NGV customer would only see a price increase of 30-50 percent.
  
  In addition, the price of petroleum continues to remain high, and future prices are uncertain as a result of continuing political unrest in key oil producing nations. Further, as worldwide demand continues to grow, petroleum prices will continue to climb. Compounding this upward price pressure, beginning in three years, gasoline and diesel fuel refiners must begin producing these fuels with a significantly reduced sulfur content. The sulfur content of gasoline must be reduced from 300 parts per million (ppm) to 30 ppm; The sulfur in diesel fuel must be reduced from 500 ppm to 15 ppm. These lower sulfur fuels will be even more expensive that currently available high-sulfur petroleum-based fuels.
  
  The combination of all these factors means that, even at the higher natural gas prices we are experiencing today, the price of natural gas for vehicle use will remain below gasoline and diesel.
  
  
• Won’t a growing market for NGVs put even more upward pressure on gas prices?
  The 23.2 trillion cubic feet (Tcf) of natural gas used in 2002 represented 24 percent of all primary energy used in the U.S. Of that amount, the 130,000 NGVs operating on U.S roads consumed between 8.3 and 12.1 billion cubic feet (bcf) annually, which represents to about 0.036-0.052 percent of total U.S. natural gas consumption. Even if the number of NGVs were to increase 100-fold in the next ten years to 11,000,000 or roughly 5% of the entire vehicle market (a formidable goal), the impact on natural gas supplies and the natural gas delivery infrastructure would be small -- equating to about 4 percent of total U.S. natural gas consumption.
  
  
• What about natural gas supply for the longer term?
  Advances in exploration and production technology will continue to expand the recoverable resource base for natural gas and make the finding and producing of natural gas less expensive. Simply put, technology and efficiency will reduce costs. In addition, there are huge natural gas resources on public lands in the U.S. that are off-limits to drilling. The current run-up in natural gas prices is increasing political pressure to allow gas exploration and production in these areas. Further, importing natural gas by pipeline (from Canada and Mexico) or in liquefied form (from stable areas such as Australia and the Caribbean) will become increasingly economic. There is also a huge potential in the U.S. for producing methane (the largest component of natural gas) from biomass, landfills and from methane hydrates in the Outer Continental Shelf. For all these reasons, natural gas will continue to be a major, clean energy source for America well into the 22nd century.