Natural gas prices have soared to a 14-year high. Here's why.
Add natural gas to the list of commodities in the U.S. whose prices are surging. Costs for the fossil fuel, which is used for heating and electricity as well as to produce plastics and petrochemicals, this year jumped to a 14-year high. The spot price for natural gas at the Henry Hub — a U.S. benchmark — crossed $8 per thousand cubic feet this week, its highest level since 2008.
"These prices are unsustainably high," said Pavel Molchanov, an analyst with investment bank Raymond James.
At their peak, natural gas prices averaged $4.40 per thousand cubic feet in 2008 and 2014, while diving to $2.10 at its low point in 2020. By that measure, the current price is "definitely off-the-charts high, and that's not going to persist forever," Molchanov said.
Hotter weather, slimmer supply
A drop in the U.S. supply of natural gas kept in storage is driving the recent price spike. Gas in storage was 17% below its five-year average for this week, according to the U.S. Energy Department. At the same time, commodities traders reacted this week to predictions of hotter weather in the Southwest. Hot weather drives up gas prices by creating more demand for cooling.
"Weather can move these prices up and down dramatically sometimes," Molchanov said. "If it's a very hot summer, that pushes the price up — a very cold winter pushes the price up."
This week's price moves come after a big drop in U.S. gas production in 2020, when extraction of gas, oil and other fossil fuels all but stopped.
"In the middle of the pandemic, the gas industry went off a cliff," David Victor, professor of innovation and public policy at the University of California, San Diego, told CBS News.
Many smaller gas producers who started up in the fracking boom went out of business during the pandemic, while larger companies pulled back on production to protect their margins.
"That decline happened and ran its course just when the global economy started taking off last fall, and we've been whipsawed," Victor said. "The demand is back, but supply is taking a while to catch up."
Ukraine war a minor factor
Meanwhile, record U.S. exports of liquefied natural gas are contributing to keeping domestic supplies low. Earlier this year, the U.S. became the world's largest exporter of the fossil fuel.
While President Biden has pledged to supply more gas to Europe to replace Russian gas, it's not clear where that additional gas will come from because nearly all of the U.S.' LNG exports are already spoken for, Victor said.
"Almost all the world's liquefied natural gas supply is sold under contract, and these contracts are decades in length. There is very little LNG that is available to be re-routed from one region to some other region," he said.
"The war is having a massive effect on the price of natural gas in Europe, but it's a very, very minor factor in raising the price of gas in the north American market," he added.
Utility prices could rise
Unlike the gasoline most Americans purchase at the pump to fuel their cars, most consumers don't pay for natural gas directly. Rather, it's an input into the costs of electricity, heating and consumer goods like plastics in much of the country. That means the impact on consumers would be slightly less than you'd expect from a tripling of gasoline prices.
Still, Victor of UC San Diego said that higher natural gas costs will likely lead to higher power bills, with some lag time as utilities set higher rates.
"In most of the country, the marginal power generator — the generator that turns on to keep the grid going, that's natural gas," he said.
The seasonality of the current price spike could also mean that natural gas stays more expensive for longer, Victor explained. Natural gas traders typically take advantage of lower prices in the spring and summer to put gas into storage, but the current high prices could create a knock-on effect to keep prices elevated through the end of the year.
"It's quite possible that high gas prices will linger into the winter," he said.
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