Natural-gas prices double, but where's the furor?

Much is said about rising gasoline prices, but another huge fuel problem may loom.

Rising gasoline prices in recent months have focused much attention on oil. It was big news when Saudi Arabia said July 3 it would increase output by 500,000 barrels per day. And Vice President Al Gore made headlines by hammering oil companies for keeping the pump prices too high - a charge many economists find dubious.

Much less attention has been paid to the doubling of natural-gas prices since last year. Industry buyers assume a tight supply of the fuel next winter and are making efforts - not fully successful - to buy gas for storage in old gas wells for winter use.

For homeowners who use natural gas, the price increase could boost air-conditioning bills now and heating costs next winter.

But their bills won't double, notes Roger Cooper, executive vice president of the American Gas Association in Washington. That's because only one-third to one-half of a gas utility bill stems from the cost of the fuel. The rest covers service costs - transmission, metering, billing, maintenance, and so on.

Further, gas companies buy only a portion of their supplies on the "spot market," where the wellhead price has jumped from $2 per thousand cubic feet (Mcf) a year ago to about $4. They buy most of their gas under long-term contracts.

Typically, gas utilities these days are asking regulators for only a 20 percent increase in rates. "Higher gas prices are not good for the utilities," says Mr. Cooper. Most just pass along the extra gas costs; they don't have a profit markup on the fuel, he says. "But we are the ones who take the political heat on it."

And natural-gas consumption may fall as commercial and industrial customers switch to alternative fuels or cease operations. Many have contracts providing for "interruptible" service, should a natural-gas shortage develop, getting a slightly lower price in return.

Residential users won't have their gas supply cut off in the event of a gas shortage next winter. It will be the interruptible customers who get hit.

Daniel Yergin, a famed energy economist and chairman of Cambridge Energy Research Associates, has longer-term concerns. "The United States is making a major bet on future [natural] gas supplies - without realizing it," he told a congressional hearing in May.

Mr. Yergin wonders whether the industry can keep up with the hugely expensive infrastructure needed to keep up with the growing demand for the relatively clean fuel. Exploration, drilling, pipelines, distribution lines, and so on take time as well as money to build.

This year, Americans will consume about 23 quadrillion British thermal units of natural gas. (That's a measure of heat used to reduce all sources of energy to a common equivalent.)

Petroleum products - still the biggest source of energy - will provide 39 quads. Coal provides 22.5 quads, nuclear power 7.3 quads, renewable energy (mostly hydroelectric power, but also wind power, fuel cells, solar power, etc.) 6.8 quads.

Despite two decades of efforts to expand their usage, renewable energy sources outside of hydro remain relatively tiny.

In the next 20 years, natural gas will become an even more important source of energy. Almost all new power plants are gas-fired. The federal Energy Information Agency says natural-gas consumption will grow 1.8 percent per year on average.

That's higher than for oil (1.3 percent) or coal (1 percent). With environmental rules uncertain, no large coal-fired electricity plants are being built. Nuclear power will shrink (2.1 percent a year) as old plants are shuttered and no new plants are built. Renewable energy grows at only 0.8 percent a year, partly because no new major hydro facilities are built and some old dams are torn down to accommodate salmon runs.

Natural gas, which supplies about 23.4 percent of total national energy consumption now, will grow to 28 percent by 2020. That's a significant shift in this massive and important market.

A study for the American Gas Association by a consulting group, Washington and Policy Analysis, finds that with policies stimulating gas use and removing barriers, gas consumption could reach 35 quads by 2020. That's well above the 32.4 quads estimated by federal economists.

Either way, it will take a lot of drilling.

One reason for high gas prices today is that low prices discouraged drilling. In April 1999, there were 371 rigs pushing holes into the ground in the US. Five months later, as gas prices rose above $2 per Mcf, there were 600 at work.

Even the rusty rigs are being put into service, says Cooper. But gas supplies will be tight, especially if the winter is a cold one.

(c) Copyright 2000. The Christian Science Publishing Society

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