6.9.03

Frequently Asked Questions About Natural Gas Trends
(From the American Gas Association)

Last summer, wholesale natural gas prices were at $3 per thousand cubic feet. Now they're twice that. What's happening?

Natural gas is increasingly popular for use in homes, businesses, factories and electric power-generation because it is efficient, clean, and reliable.

However, natural gas production has not kept pace with rising demand, and the market price of natural gas reflects this. The wholesale price of natural gas (around $6 per thousand cubic feet) is twice as high as it was this time last year (around $3).

Natural gas meets one-fourth of the United States' energy needs, and is our country's fastest-growing major energy source. In addition to home-heating, natural gas is a backbone of American manufacturing -- used to make a wide range of things, such as fertilizer, aspirin, automobiles, steel, plastics, processed food and even electric power.

Thus, natural gas helps to fuel economic growth.

There are ample quantities of untouched natural gas resources in the United States and Canada.

However, as actively-drilled natural gas wells reach their "golden years" it becomes increasingly difficult for natural gas producers to meet current demand -- much less create a "cushion" of natural gas supplies that will help bring prices down.

ECONOMIC IMPACT

What is the impact of these price swings on the U.S. economy?

Federal Reserve Board Chairman Alan Greenspan made a strong statement in Congress May 21, calling the natural gas supply crunch "a very serious problem."

It's tough to rebuild the U.S. economy when companies that make fertilizer, chemicals, glass, steel and other products are paying nearly three times as much for natural gas as they did just a few years ago. A number of manufacturers have slowed production, laid off workers and even gone out of business because of natural gas prices.

From a residential point of view, when some families paid $100 more to heat their homes last winter, it meant they had $100 less to spend on other things.

PRICE VOLATILITY

What steps are utilities taking to manage price volatility?

Natural gas utilities take several steps to cushion the impact of price fluctuations on their customers:

• Underground storage -- Many natural gas utilities purchase natural gas during the spring and summer months, and store it underground for use on cold winter days. In fact, about 20 percent of the natural gas consumed during the winter comes from storage. This helps ensure enough natural gas is on hand to meet customers' needs.
• Hedging -- More than half of the states allow utilities to use financial tools such as hedging to purchase part of their natural gas supplies. An example of a "hedge" is buying a certain amount of natural gas at a fixed price.
• Contract terms -- Just as homeowners shop around for food and household items, gas supply managers obtain their gas supplies from a variety of sources and under different contract terms.
• Billing plans -- Most utilities offer balanced-billing plans that allow customers to spread their natural gas costs over many months, which makes it easier for people to handle winter heating bills.

THE MAIN SOLUTION

How do you bring natural gas prices down?

There is a short answer: INCREASE SUPPLY. It's in consumers' best interest to do so.

During the 1990s, consumers enjoyed natural gas at affordable prices because available supplies of natural gas were greater than demand. Supply and demand are now in a very tight balance, and changes in the weather or economic activity have an almost immediate impact on the wholesale price of natural gas. More supply = lower prices.

Why is it so hard for natural gas producers to keep up with demand?

The 6,000 companies that produce natural gas in the U.S. face some stiff challenges:

Many wells that have produced abundant natural gas for years are becoming depleted.

It is sometimes difficult and more costly to pull natural gas from mature reserves. That's why it is important for producers to be able to move to fresh supply areas, and use the best technologies to find and produce more natural gas.

Even when producers hold valid leases, they often face months of delays in getting federal or states permits to start working on bringing energy supplies to consumers.

What's going to happen this summer?

Keep an eye on the weather. Natural gas utilities are in the process of buying natural gas that they'll store underground for use by customers next winter. If summer gets hot and power generation plants need more natural gas for electricity, the price competition may make wholesale prices go up.

What can be done to alleviate the price crunch this year?

Unfortunately, options are pretty limited for the next few years. Efforts that can be taken in the short-term include:

• Increase supply -- Even with dramatic production efforts, it typically takes 6-18 months before there is a sustained supply response to higher prices. A fraction of the natural gas we use is imported from other countries in a condensed liquid state; efforts can be made to increase these liquefied natural gas (LNG) imports.
• Decrease demand -- Another way to alleviate the supply crunch is for factories and other customers that use large amounts of natural gas to slow down production lines or move their operations overseas. However, this obviously has a harsh impact on American workers, local economies and corporate earnings.
• Energy conservation -- Encouraging natural gas customers to use energy more efficiently can help, too. For example, during hot weather, consumers can cut back their use of electricity to ease the amount of natural gas needed to generate electricity. Before the winter, consumers can improve their home insulation. While efficiency alone can help it isn't a long-term solution -- only increased supplies will make a major difference as demand for natural gas continues to grow.

What long-term steps can be taken to ensure that natural gas supplies are there when customers need them?

This summer, Congress should pass a national energy strategy bill. The U.S. House of Representatives passed its version of the bill in April, and the U.S. Senate is debating its bill in June.

There is wide agreement on the need for construction of a pipeline to transport abundant supplies of natural gas from Alaska to the Lower-48 states.

Congress and other federal officials must also address the many contradictions that have created the situation we're in. For example, many laws encourage use of natural gas -- such as for generation of electricity -- because it is cleaner than coal or oil.

But the federal government hasn't updated the laws that govern the exploration and production of natural gas in almost a generation, despite tremendous developments in the technologies used to find and produce the natural gas.

Natural gas cost information

What can you do?

1. Sign-up for the Budget Plan.
2. Weatherize your home, business. E-mail us to request "An Energy Saver's Guide."

What is M.U.D. doing?

We have gas in storage to use for the coming winter.

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