Electricity Rates Are Climbing in 2022

Why Is Natural Gas So Expensive Right Now?

Leonardo D for Quick Electricity

Natural gas is one of the main energy sources in the US. Homes and businesses use it directly for space and water heating, and indirectly when consuming electricity – natural gas accounted for 38.3% of generation in 2021, according to the Energy Information Administration. However, this also means all sectors suffer an increase in their energy costs when gas is expensive.

The high price of natural gas as of May 2022 is the result of several factors. Supply chains have been constrained, US inflation rates are at a 40-year high, and the prices of many products and services are on the rise. Natural gas prices in particular have been greatly affected by the war between Russia and Ukraine:

  • Russia is a major natural gas producer, and Europe depends heavily on Russian gas delivered via pipeline.
  • Since the conflict started, European countries are looking for other sources of natural gas, to reduce their dependence on the Russian supply.
  • The US has increased liquefied natural gas (LNG) shipments headed for Europe.

There is a high demand for natural gas, precisely when supply is constrained by the Russia-Ukraine conflict, and the result is high prices.

Natural gas futures have been trading above $7 per million BTU in recent weeks, as you can see in MarketWatch, reaching prices between $8 and $9 per MMBTU during the first week of May. For comparison, prices were below $3 per MMBTU one year ago, which indicates a 12-month increase of over 130%. Natural gas futures are at a 14-year high, trading at prices not seen since September 2008.

The fossil fuel industry can easily ramp up production when oil prices are high, and this helps stabilize the price (supply and demand can balance). However, increasing gas production in response to high prices is not so simple, and prices keep rising due to the gap between supply and demand.

  • Natural gas production capacity is often locked up by long-term contracts, which often require annual increases in supply.
  • Building new pipelines is slow and expensive, and LNG shipments cannot match the delivery rate of pipelines. Globally, only 13% of natural gas is delivered by ship.

We often associate natural gas with heating appliances, which tend to have a higher usage during the winter. However, high gas prices affect our energy costs all year long. Remember that homes and businesses are using their air conditioners during summer, and peaks in electricity consumption are normally covered by gas-fired power plants. Wind turbines and solar farms can help reduce energy prices, but they cannot be used on demand – only a dispatchable source like natural gas can respond to sudden peaks in consumption across the grid.

Mary Pressler

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