Focusing on Natural Gas Prices

By Heide B. Malhotra, Epoch Times
March 27, 2013 9:12 pm Last Updated: April 3, 2013 7:48 pm

Focusing on natural gas prices is not a fad that boosts consumers’ adrenaline, and it doesn’t hold the U.S. populace in thrall as many other subjects do, such as the deficit.

But, discussions have been underway, and writers are suggesting reasons for the rise or drop in natural gas prices and why U.S. natural gas prices are at a level that doesn’t allow producers to make a decent profit. According to natural gas experts, natural gas exploration will suffer in the long run, and once there are shortages, prices will rise again.

“U.S. domestic natural gas prices continue to sell at a huge discount to worldwide oil and natural gas prices,” a Feb. 22 article on the Seeking Alpha website states.

According to the YCharts website’s historical data on retail gas prices, natural gas prices have fluctuated between $3 and $4 since May 23, 2011, after reaching $4.014 on May 16, 2011, and peaking at $4.018 on May 9, 2011. This year, gas prices dropped from $3.826 on March 4 to $3.764 on March 18.

It is important to understand the economic advantage natural gas provides the United States. “U.S. natural gas reserves, combined with its 2 million+ miles of natural gas pipelines which distribute it to every major city and 63 million homes, is a huge economic advantage for America. Some believe it to be this country’s No. 1 economic advantage over all others,” according to the Seeking Alpha article.

 

Natural Gas Leaving U.S. Soil

The Seeking Alpha article asks the reader to consider what would be in the best interest of the United States. “Should the U.S. use its natural gas bounty for transport or export?”

At issue are 16 applications for the development of export liquefied natural gas (LNG) terminals, which are under consideration by the U.S. Department of Energy (DOE).

“The pending applications would add export capacity for immense volumes of gas equivalent to about 45 percent of current domestic production,” a Feb. 25 Sierra Club announcement states.

In a Feb. 25 letter to the DOE, the Sierra Club also states that providing LNG export licenses would increase natural gas prices for the American consumer in the long run. LNG export licenses would not benefit the American taxpayer but instead a “small minority of wealthy corporations that will own natural gas resources or LNG export infrastructure.”

 

Politics Driving LNG Exports

“Since the U.S. Department of Energy must approve any export terminal, politics are involved,” the Seeking Alpha article states.

The concern is that the energy policy instituted by the DOE is sometimes not based on what is best for the United States, but on politics, and driven by congressional needs. One political factor that has been reportedly impacting DOE policy is the landmark U.S. Supreme Court ruling that refuses to limit campaign contributions by corporations and unions.

“The main reason natural gas transportation is not supported by the U.S. government is campaign financing. … Congress does not craft energy policy on the basis of what is best for middle-class Americans (as it should). Rather, policies are implemented on the basis of what is best for the companies that bankroll Congressional re-election campaigns,” the Seeking Alpha article suggests.

During a hearing by the House Oversight and Government Reform Subcommittee, U.S. Rep. Blake Farenthold (R-Texas) urged the DOE to grant the export licenses, citing economic benefits. Farenthold suggested that low gas prices are uneconomical for continued production of LNG without exports.

“Considering the abundant supply in our backyard, there is no reason why we shouldn’t be capitalizing on exportation to create good paying jobs in the oil patch and beyond,” he said in an announcement on his website.

Not all legislators are excited about exporting America’s LNG. According to a March 14 announcement, U.S. Reps. Edward J. Markey (D-Mass.) and Rush D. Holt (D-N.J.) introduced three bills that would keep U.S. LNG in the United States.

Also, several energy cost studies suggest that exports of LNG would have significant detrimental impact on gas prices, affecting not only the American consumer, but also firms in industries that use high amounts of natural gas. These firms would move location whenever gas prices rise and affect the local job market negatively.

Two of the bills “would call a 10 year time-out on the export of oil and gas produced from America’s public lands,” according to the announcement.

The third bill would order the DOE to develop a different method of determining what is in the public’s best interest because the present policy is tilted toward export firms.

“DOE’s current process favors exporters because natural gas exports are presumed to be in the public interest unless it can be demonstrated that they are not,” the Markey announcement states.

 

Manufacturing Renaissance

“A manufacturing renaissance is under way in the United States, and it is being driven by a favorable natural gas price environment not seen for over a decade,” according to a Feb. 25 report by consulting firm Charles River Associates (CRA), which was commissioned by the Dow Chemical Co. and published on the CRA website.

When using LNG domestically, direct and indirect employment in the U.S. manufacturing sector is affected positively, according to the report. When the LNG is used domestically, 180,000 individuals are needed; when it is exported, the number of annual jobs is reduced to 22,000.

Secondly, CRA “determined a $52 billion annual trade benefit from manufacturing, which would come in the form of both increased exports and decreased imports. This would lead to a $37 billion trade surplus.”

 

Benefiting From LNG Exports

“Exxon Mobil is very likely to end up exporting vast amounts of natural gas from the United States,” the Seeking Alpha article suggests.

Golden Pass Products LLC, which is owned 70 percent by Qatar and 30 percent by Exxon, received the go-ahead to export U.S. LNG in October 2012. The Seeking Alpha author assumes that Exxon’s annual profit would be more than $1.4 billion.

Exxon has its course of action all mapped out, the Seeking Alpha article suggests. To date, Exxon produces the most LNG in the United States. By exporting LNG, it will earn three times what it earns domestically. Once the cost of producing, transporting, and insuring the gas becomes too high, Exxon will sell to domestic sources, as prices will have adjusted to the export prices.

Exxon has covered all the bases. “Once the exports slow down and domestic gas inventories build, no problem: turn on the LNG export spicket [sic] again. Exxon Mobil will win either way,” the Seeking Alpha article suggests.

 

Natural Gas Pricing

“The price that residential consumers pay for natural gas has two main parts,” according to the U.S. Energy Information Administration (EIA) website.

The first component is the commodity cost, also called the wellhead cost, which is the price at the well, less the transportation cost the producer of the natural gas charges.  

The second component is the transportation and distribution cost, including transportation through pipelines or any other form of transportation to the local gas company and ultimately to the consumer. The price depends on the market conditions and location of the customer. The greater the distance the gas has to be transported, the higher the cost.

“Although national average prices for residential natural gas have declined in recent years, the prices in individual states can differ greatly,” according to the EIA website.