April 11, 2009 in Business

Natural gas glut a boon to users

Next winter’s bills should fall sharply
Mark Williams Associated Press
 

Price drop

Natural gas futures ended this week at $3.61 per 1,000 cubic feet. That’s a decline of 74 percent from a peak of $13.69 in July.

COLUMBUS, Ohio – The 60 million American homes that rely on natural gas for heat can expect substantially lower bills next winter thanks to a glut in supply and the weak economy.

Just as distributors start to lock in contracts for the coming winter, natural gas prices have fallen almost 75 percent. Not all of that will show up as savings on the heating bill, but it should still mean noticeable savings.

Utilities also generate about a fifth of the nation’s electricity with gas, and many of their customers should notice price breaks as well.

Electric utilities burn natural gas at power turbines, so homes that use electric heat could see big price breaks, too. And barring a scorching summer or a brutal hurricane season, analysts say prices could fall even further.

The reason: New technology this decade has unlocked massive reserves of natural gas in North America, and the sudden jump in supply has collided with a recession, the worst since World War II, that has sapped demand.

The result has been a collapse even more dramatic than the drop in oil prices.

Natural gas futures ended this week at $3.61 per 1,000 cubic feet, down from a July peak of $13.69. That’s a decline of 74 percent, compared with a decline of 64 percent in oil prices over the same period.

Households have yet to see those huge drops reflected in their heating bills because the companies that buy and distribute natural gas in bulk are still passing on the premium prices they paid last summer.

But lower rates are almost certainly coming. Distributors are already signing contracts for next winter that lock in today’s low rates.

In addition to the 60 million homes that use natural gas for heat, about 32 million use electric heat, according to government figures. That’s more than 80 percent of U.S. homes. Most of the rest use fuel oil or liquefied petroleum gases.

A 75 percent decline in the price of natural gas does not mean the heating bill will decline by that much. On average, the price of gas makes up about two-thirds of the bill with transportation, taxes and other expenses covering the remaining costs. Americans spent about $60 billion on natural gas for heat this past winter.

Distributors don’t profit from the price of gas. They typically make money from getting the gas to your home. If they want to charge more, they need approval of state regulators.

In some places, natural gas bills are already way down. The average bill this month for customers of Columbia Gas of Ohio will be $101.54, the lowest in five years and down 26 percent from a year ago.

Many people switched to natural gas after a huge spike in the cost of heating oil last year. Heating oil is down this year as well, although not as much as natural gas.

The last supply glut in natural gas came to an end in 2002. Prices climbed, and producers began drilling more, finding new ways to pull natural gas from places previously considered unreachable.

For example, in the layered sedimentary rock known as shale, bountiful in a region stretching from Texas and Oklahoma into Appalachia, drillers learned how to free gas by forcing water into small boreholes and fracturing the rock.

Five straight years of record activity turned into 148,000 new wells, according to the American Gas Association.

© Copyright 2009 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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