Your Ability to Choose Should Increase Competition
In years past consumers didn’t have a lot of choice when it came to their natural gas supplier, they were tied to the local gas utility, so if they wanted to charge a 541% markup you were pretty much stuck. But just prior to the new millennium states began allowing gas and electric customers the ability to choose their suppliers even though delivery was still made through local utilities. For instance beginning in February 1999 New Jersey gas customers were given the ability to choose their supplier. Theoretically this should help you to keep your prices down due to competition but in order for it to work you need to compare prices and actually take the time to switch and most customers didn’t bother. So let’s look at what has really happened to gas prices in relation to the Cost of Living.
What is the “Real” Inflation Adjusted Price of Natural Gas
In economic speak, the term “real” refers to the Inflation Adjusted Price, in other words since all prices are increasing (including wages) due to an increase in the money supply you have to adjust everything using the inflation rate in order to compare prices today with prices from an earlier time. So, theoretically, even though prices are increasing, as long as everything increased at the same rate (including your wages) you would be no worse off. Unfortunately, everything does not increase at the same rate, so you need to adjust prices for inflation in order to see whether they are increasing faster or slower than everything else. Thus getting relatively cheaper or more expensive.
In the following chart we will look at the inflation adjusted price of natural gas at the wellhead. That means how much gas producers get for selling their gas. As you can see, the inflation adjusted price peaked in October 2005 although the nominal price didn’t peak until July of 2008. The blue channel lines show us that the price both “inflation adjusted” and “nominal” (i.e. the actual price paid) has been decreasing since the 2005 peak. The drop below the channel is probably due to recessionary forces in the 2008 crash and not due to the increased production of natural gas.
By looking at the inflation adjusted price we can see that current prices in “real” terms are back in the range they were in the period from 1986 – 2000 at the equivalent of $2.00 -$4.00 in June 2013 dollars. This is probably due to the increased supply of natural gas due to improved recovery techniques such as “fracking”.
Fracking Increases the Supply of Natural Gas
Fracking has been major news over the past few years because it has made possible the recovery of Oil and Natural Gas in places that were previously uneconomical or impossible. Most of the oil and gas from earlier wells came from large underground reservoirs but today rather than being in reservoirs the oil and gas is located in small cracks in the underground rock. Induced hydraulic fracturing aka. fracking, is a technique in which a mixture of water and sand is injected at high pressure into a wellbore to create small fractures or cracks. When the hydraulic pressure is removed from the well, the small grains of proppant (sand or aluminum oxide) which were mixed with the injected water hold the fractures open allowing fluids such as gas or petroleum to migrate to the well.
Although fracking was first invented in 1947, it wasn’t until recently that it has come into widespread use and it has opened up the ability to tap vast new reserves of oil and gas. That in turn has had the effect of driving down the price of Natural Gas at the Wellhead. As you can see from the following chart the Wellhead price (blue line) has fallen from over $10 per thousand cubic feet in 2008 to $2 per thousand cubic feet in 2012. That is more than an 80% decrease. Since then wellhead prices have started to increase a bit to just over $3.
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If we look at the residential price we see a different picture. the residential price is much more cyclical than wellhead prices. Residential prices regularly bottom and peak throughout the year. As you would expect residential consumption peaks in the cold months and is virtually non-existent in the summer months. And as we see from the chart below that is exactly what happens, overall usage peaks in January and has lows in May/June and September/October.
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Summer demand for natural gas comes from utilities using it to produce electricity and because of the decrease in price of Natural Gas compared to Coal, many electric utilities are switching to Natural Gas thus driving up summer demand. As we can see from the chart below even though prices have been trending down at the wellhead the residential consumer has not benefited as much as you would expect because the difference between wellhead prices and the price the consumer pays has been increasing.
Other Inflation Adjusted Price Comparisons:
- Historical Oil Prices Chart
- Annual Average Oil Prices in Table Form
- Inflation Adjusted Gasoline Prices
- Inflation Adjusted NYSE Stock Index
- Inflation Adjusted Price of Corn
- Inflation Adjusted College Education Costs
- Inflation Adjusted Electricity Prices
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