Natural Gas Prices and Market Fundamentals (CRS Report for Congress)
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| Release Date |
Dec. 8, 2004 |
| Report Number |
RL32091 |
| Report Type |
Report |
| Authors |
Robert L. Pirog, Resources, Science, and Industry Division |
| Source Agency |
Congressional Research Service |
Summary:
Intermittently high, volatile natural gas prices since 2000 have raised concern among all types
of
consumers. Residential customers have seen gas bills increase dramatically during the heating
season. Industrial consumers have seen costs increase, which reduces their competitiveness.
Because the price of natural gas at the consumer level is a mixture of market forces and regulation,
explaining the behavior of price can be difficult.
Debate in the 108th Congress concerning the energy bill ( H.R. 6 ), considered
provisions which are intended to improve long term natural gas supplies in the United States. Other
issues are likely to be brought before the 109th Congress for consideration. This paper analyzes the
short term forces which influence the natural gas market.
The Energy Information Administration has developed a metric called the effective capacity
utilization rate as a framework for analyzing the economics of the natural gas market. This measure
has been shown to be correlated with the price of natural gas. When as the effective capacity
utilization rate attains high levels (90% and above) it becomes increasingly likely that tight market
conditions will yield high prices.
As a result of the Natural Gas Policy Act of 1978 ( P.L. 95-621 ) and subsequent legislation in
1989 and 1992 ( P.L. 101-60 and P.L. 102-486 ) the wellhead price of natural gas is market
determined. Pipeline rates are federally monitored and distribution charges are regulated at the state
level. Price variability centers on the wellhead price as well as the price determined in futures
markets.
Price spikes have occurred in two of the past three heating seasons. Whether severe weather
causes price increases depends on the tightness of the market as measured by the effective capacity
utilization rate. The same level of demand could lead to very different price results if the effective
capacity utilization rate is high or low.
A variety of factors can affect the effective capacity utilization rate. Since short run supply
adjusts to meet demand, the weather will be an important determinant. The relationship between
natural gas prices and investment in exploration, development and production is an important factor
in determining productive capacity. The availability of stored gas and imported gas become vital
to price stability as the effective productive capacity exceeds 90%.
In the very short term there appears to be little that can be done from a policy perspective to
alter the fundamental economics of the natural gas market. In the longer term, policies that slow
demand growth and/or encourage the growth of supply, either from domestic or foreign sources
could be effective.
This report will be updated as events warrant.
