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Home heating energy prices: connecting some dotsLow-priced gas is a thing of the past. This means a recalibration of
how users look at it. "Natural-Gas Costs Hurt U.S. Firms" Now that winter is winding down, check your rear-view mirror. What kind of home heating energy prices do you see? Highly volatile costs, with a new record for nationwide average natural gas prices in 2003. Here along the Front Range, our price tag for natural gas increased more than in any other major metropolitan area around the country. We were all warned about this one year ago: the new Kern Riser natural gas pipeline would ship enough gas to California to bump our prices into alignment with the rest of the county. It happened. For those who heat with propane, prices were lower than in 2000 but higher than the past two years. If you heat with either fuel, expect more of the same both mid-term and longer term. For the few who heat with electricity, those prices surged but not as fast. For anyone keeping score, this article counts as the fourth story featuring home heating prices by this writer in four years. That's because there's a very serious message here. Otherwise, you wouldn't be hearing from heavyweights like Alan Greenspan with the Federal Reserve Bank or from the National Petroleum Council, weighing in on this subject from around the country. In the future, prices will still fluctuate, but within the new higher price band. That means you should expect to hear about Greenspan's "chronic concern about energy price spikes." Some of your home shoppers are listening. THE BIG RUBHere in North America, we're passing a major milestone. According to the industry's National Petroleum Council report to the U.S. Energy Department last September (www.npc.org), daily natural gas production in North America is at or near its peak level. ''Peaking" doesn't mean "running out." Peaking does mean
that the days of increasing production and cheap fuel are over. Next year
we'll likely struggle to produce the same amount of gas we produce today.
Declines are around the bend. GREENSPAN, NPC SOBERLast spring and early summer, Greenspan went before congressional committees three times, delivering a tough message: "We are not apt to return to earlier periods of relative abundance and low prices anytime soon." He stressed the need to expand our liquefied natural gas (LNG) import capacity several-fold. Last September, a weighty National Petroleum Council report on natural
gas stated. "production from traditional U.S. and Canadian basins has
plateaued. ...Current higher gas prices are the result of a fundamental
shift in the supply and demand balance." FUTURE NATURAL GAS PRICESSo the writing is on the wall for methane. The days of $2 gas (wholesale, per million Btus) are history. Last year's record price averaged over $5.. and at press time prices for futures contracts run $4.50 to $6.00 through 2008. Sadly. you received no national-level warning from officials at the U.S. Energy Information Agency (EIA) who are paid to follow the industry and project prices. In fact, as recently as early 2002. FAA was still forecasting that natural gas would be cheap and abundant for a couple of decades. That poor information, often repeated during the mid-1990s, helped lead utilities to build dozens of large natural-gas-fired electricity generators all over the country. (This writer and a colleague wrote this up as "Methane Madness.") As a result, today we're in the early stages of multi-year problem with
competition for natural gas between utilities, industry and homeowners. That
means higher prices for everyone. CONNECTING DEMAND DOTSTrying to make sense of wildly gyrating energy prices is tough. In the coming years, here's a list of dominant demand and supply variables that will impact prices to your homebuyers. Weather roulette. Nothing impacts natural gas prices as much as weather. That's because winter and summer, weather drives demand. Nationwide, the winter of 2002/03 was only 4 percent colder than average yet prices rocketed. Through early March, this heating season has been 2 percent warmer nationwide than average; if it had been colder, prices might turned really ugly. Demand destruction. When energy prices rise, some manufacturing industries either switch fuels, slow down or shut down production. Energy economists have coined a harsh new phrase for this phenomenon: "demand destruction." Decreased demand eases fuel costs. but people who lose jobs don't buy houses. The U.S. economy. Historically, energy consumption tracks growth: more growth means more demand for energy. then moderately higher prices. But energy price swings these past three years have hammered us, leading to economic hiccups. The feedback loop is getting shorter, even though the housing industry hasn't felt the full sting this time around. If energy prices help revive inflation, the low interest rates that supported housing may jump. The world economy. Asia's rapidly growing demand for imported oil is rolling across the ocean and jacking up gasoline prices to record highs. That also pushes up natural gas prices here. CONNECTING SUPPLY DOTSDrilling rates. Drillers sunk about 20 Percent more wells last year. but production stayed relatively flat. Today there are a few idle drilling rigs in the heartland, but not many idle skilled crews to run them. In Canada, which ships us 60 percent of their natural gas, production is also down. and skilled labor is in even shorter supply up north. Depletion rates. Technology makes it easier to extract gas faster, so production from the average new well today will drop 50 percent per year. And since we drilled the sweet spots first, explorers generally turn up smaller pools of gas now than in the past. We're on a treadmill here. Frontier gas. The largest proven natural gas reserves lie below the Artic frontier. but getting that gas down here will be slow and expensive. LNG. Three times more proven gas can he found in the world's largest gas field (in Qatar) than there is in all of North America. The only way to get that gas over here is to liquefy it (LNG). But it will take many billions of dollars to build the necessary liquefaction and regasification plants. plus LNG tankers at $160 million a pop. Again, more slow gas, but with increased vulnerability of supply. By 2010, in Yogi's wording of deja vu all over again, the betting here is that LNG exporters will form a cartel to help push up prices. THE MID-TERM VIEWIn the short term, I've soured on the chances that an energy bill will pass in 2004, despite the blackout that hit 57 million U.S. and Canadian citizens last August. Even if a scaled-down version passed, it wouldn't deliver any quick fixes, at least on the supply side. What the petroleum industry calls "the fundamentals" won't change that much. Some good news today is that all the key players are talking the talk about efficiency's potential role in reducing our energy problems. But talk is cheap. hence the oversupply. Sonic day an energy bill will probably include a $1,000 to $2,000 tax credit encouraging building homes 30 percent and 50 percent (respectively) more efficient than the International Energy Conservation Code requirement. This writer has been holding his breath for four years over that credit; it's getting old. Here's something to bank on: buyer interest in energy efficiency will continue rising. Just don't bank on an overnight gold rush. Steve Andrews consults with builders for E-Star Colorado and writes on energy issues (sbandrews@att.net). E-Star (www.e-star.com), is a nonprofit home energy rating system that works with both new and existing homes statewide. |
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2008 Built Green Colorado
Home Builders Association of Metro Denver, 9033 E. Easter Place, Suite 200,
Centennial, CO 80112 Last Updated: 10/05/2007 |