Natural gas prices in the United States, spiking to their highest level in over a decade, remain a fraction of the surge seen in Europe.
But the prospect of further price increases translating to higher utility bills this winter, when demand is highest, could shock U.S. homes and businesses that grew accustomed to a long period of low natural gas prices thanks to the shale boom.
The issue of high energy prices more broadly has drawn the attention of the Biden administration, which fears political damage ahead of next year’s midterm elections and a backlash against its agenda to move the economy off fossil fuels.
“While natural gas prices are not as visible to consumers as retail pump gasoline prices, any persistent spike will hit consumers already grappling with broadly rising prices,” said Bob McNally, a former top energy official in the George W. Bush administration. He now leads the research group Rapidan Energy. “That we are in much better shape than Europe won’t be of much solace to the Biden administration if this winter is cold.”
Natural gas prices continue to climb higher in the U.S. as supply struggles to keep up with demand recovery from the coronavirus pandemic. Demand will only increase as temperatures begin to drop across the country and heaters are switched on in houses.
With domestic storage inventories below five-year average levels, U.S. benchmark natural gas prices have already doubled from a year earlier, approaching $6 per million British thermal units.
But $6/MMBtu gas remains low on a historical basis and represents just one-sixth of the price in Europe.
Before the shale boom, double-digit prices in the U.S. were the norm.
“Prices are stable relative to history,” said Richard Meyer, vice president of energy markets at the American Gas Association. “Sometimes, I am afraid we have short memories on how markets behave. This is still a functioning market working well.”
The risk of customers feeling pain from price spikes is much less than in Europe, despite how much the U.S. economy has come to rely on natural gas as an electricity and heating source.
That’s because our sizable domestic supply of gas from shale drilling provides a layer of protection, while Europe must import most of its gas.
But despite the robust availability of domestic oil and gas, the biggest question looming that could determine whether prices fall is whether U.S. producers respond as would generally be expected with high prices.
U.S. natural gas producers are reluctant to drill more because they face growing pressure from Wall Street to demonstrate capital discipline. In addition, investors have soured on fossil fuels in response to public pressure to address climate change.
“If you are saying, ‘I guess we are going to have low prices forever because we have all these molecules in the U.S.,’ that is part of the story, but without investment, that’s not going to be true,” said Kevin Book, managing director of ClearView Energy Partners, a research group.
McNally said producers are wary of previous spending sprees during price spikes that left them burdened with debt.
“Producers won’t want to inadvertently oversupply the market, which has been in a glut in recent years,” McNally said. “They know from hard and recent experience gas prices can fall as fast as they rise.”
Industry groups, however, are projecting confidence that the market will be well-supplied.
During the group’s presentation of its annual winter outlook, David Attwood, chairman of the Natural Gas Supply Association, said this week that he expects U.S. shale producers to come off the sidelines in response to high prices.
“I firmly believe the market works,” Attwood said. “There is no doubt the market is giving strong signals for production to increase.” “That supply is there and will come and meet the demand,” added Attwood, who is also vice president for Americas Trading at ExxonMobil.
Book agreed that producers wouldn’t be able to resist this level of prices.
“There is money to be made, and they will try to make it,” he said.
Whether new supply could come online in time to offset higher demand will depend on how cold winter is, which would affect how much people warm their homes and businesses heat their offices.
“If we are in T-shirts in December, we will see the market play out one way, and if we have significant cold snaps, the market will go in another direction,” Meyer said.
Even so, the natural gas price spike has already prompted a call from a trade group representing manufacturers for Energy Secretary Jennifer Granholm to stop American exporters from shipping liquified natural gas overseas to preserve supply for domestic use.
The U.S., over the last few years, has become a top exporter of LNG after previously being an importer before the shale boom.
U.S. LNG exports are especially booming now with export facilities, or liquefaction terminals, operating near capacity, as natural gas is fetching a higher price in European and Asian markets dealing with supply shortages.
McNally warned a move to ban natural gas exports to lower domestic prices would backfire.
“Banning exports may lower prices temporarily, but by breaking contracts and faith with foreign customers, investors would pull back from new U.S. natural gas investment, increasing the likelihood of price spikes down the road,” McNally said.
