Supply Demand and Pricing of a Particular Product or Service

Natural Gas Supply, Demand and Pricing

Over the past 15 years there has been a significant transformation both in natural gas supply and natural gas consumption. Wellhead price deregulation has permitted natural gas prices to adjust freely to prevailing supply and demand conditions, and open-access transportation has allowed natural gas volumes to move freely from producers to consumers. As a result of industry restructuring, natural gas supply, demand, and prices are now subject to competitive market forces, which are largely responsible for recent efficiency gains in natural gas production.

The weather is the largest single factor affecting natural gas cost and it is also the most difficult to predict ("America's Natural Gas Supply Challenge").

Most utilities use storage as a hedge against higher prices as gas purchased and stored in the summer is typically lower priced than gas purchased during cold winter months. Storage gas can then be used in the winter to avoid paying higher prices for gas from other sources. Storage is also necessary as the available production in cold weather months may not be sufficient to meet the demands of natural gas customers during peak winter demand periods in certain regions ("Natural Gas Supply, Demand and Pricing").

Normally, natural gas prices increase during the winter months when demand is greater and decrease during the summer months when demand is lower. It is also influenced by oil prices. This happens because large users are able to switch between oil and gas depending on the price of each fuel. This also influences the demand for gas, and causes the price of gas to follow the trend in oil prices ("Natural Gas Prices in Canada").

Producers of natural gas are also responding to the current prices. The drilling rig count is up 44% since 2002 and this increase in drilling activity wills likely help offset production decline and maintain U.S. production a current level. However, the producers have stated increases in new supply/production in the long run are limited without access to government-restricted natural gas reserves ("Natural Gas Prices in Canada").

As a result of the tight balance between supply and demand in the natural gas market, current natural gas prices are expected to continue to remain high through the end of the year into next year.

The price of natural gas has risen for two reasons; the increase in demand and the limitation of the supply of natural gas.

Gas demand has risen due to a number of factors, including the addition of new gas-fired electric-power generators and value-add agricultural processing plants; new home construction, and the increased use of natural gas for heating and cooking.

The supply of natural gas has not kept up with the increasing demand for natural gas. Although it is projected that we have an adequate supply for the near future, increased production will be needed to sustain this increase in demand. Gas exploration and development have increased significantly over the past year. There is a 6 to 18 months lag time between the time of initial drilling and when additional production is brought to market. Additionally, there is a limitation by the federal government that prevents drilling for natural gas in some areas that contain some of the largest potential resources left in the U.S. This has forced producers to go to more technically challenging and higher cost areas.

The result is the consumer is paying higher prices due to the limitations on supply and the increased need for additional natural gas supply.

The growing discrepancy between increasing demand for natural gas and available supplies could result in continued higher prices for natural gas consumers unless public policies and personal attitudes change about bringing fresh supplies of natural gas to market ("America's Natural Gas Supply Challenge").