Over the last several weeks, the U.S. has experienced some of its highest temperatures on record. Indeed, a stubborn heat wave of massive proportions has settled across the country like melted brass.
In the past, such sustained high temperatures would trigger a spike in the price of natural gas futures as consumers crank up their air conditioning. This in turn would cause utility bills to rise.
But as of this writing, a significant rise in natural gas cash and futures prices has failed to materialize. As of this writing, front month gas futures remain well below $3.00 per unit (MMBtu). In contrast, they were trading in the $5.50 per MMBtu range as recently as December.
Traditionally, natural gas prices are volatile during the winter and summer months and more stable during the “shoulder months” of the fall and spring seasons. One would therefore expect that, as we are in the heart of summer, withering in Venusian heat, energy prices should be both much higher and much more volatile than they are this month.
As an old salt trader and broker of energy derivatives, I can still remember when it was an established axiom, “As goes the weather, so goes natgas.” The correlation between past price action and weather events (severe cold, severe heat, or a Gulf Coast hurricane) demonstrates this. This is largely no longer the case.
Why? One answer lies in production capacity. Since 2005 — the year when Hurricanes Katrina and Rita sent natural gas futures soaring to more than $15.70 per MMBtu — natural gas production has doubled, from roughly 50 billion to 100 billion cubic feet per day. Fracking, shale, slant drilling, and expanded exploration have revealed more reserves. This has propelled the U.S. to its position as the leading producer of natural gas, making our grid far less vulnerable to this year’s outlier (or perhaps even new normal) weather events.
Indeed, so far this summer, production is outstripping demand, and by a higher ratio than two years ago at this time. This is keeping energy costs relatively stable, which is good for the consumer.
And when it comes to fossil fuels, it’s not just a matter of cheaper gasoline prices or utility bills. After Katrina, the Senate Committee on Energy and Natural Resources held hearings. The transcripts from October 2005 show how consumers are much more dependent upon fossil fuel byproducts — especially natural gas — than they realize. The committee lists, among other consumer products made from natural gas, diapers, shampoo, laundry detergent, toothpaste, beer and soda cans, milk jugs, dishwashing liquid, kitchen cabinets, paint, siding, plumbing pipes, plywood, various car parts, contact lenses, fertilizer, and much more.
And so, when there is a shock to energy prices, the entire U.S. economy follows. As the CEO of Dow put it, “Future economic historians may very well talk about the recession of 2006-2007 as being engendered by higher natural gas costs as a contributing factor.”
Traders therefore watched with considerable disquiet when, on Katrina’s 16th anniversary, Hurricane Ida made landfall. Ida was also a Category Four storm, and it landed in almost the same location as both Katrina and Rita. Yet, unlike in 2005, natural gas prices did not skyrocket, and the residual shock to consumers did not materialize. To the contrary, natural gas front month futures fell fifteen cents on the first trading afterward.
The cardinal rule of commodities prices is that they are a function of supply and demand. With Ida, as with the heat wave we’re experiencing today, the supply of natural gas remained plentiful.
Unfortunately, the Biden Administration seems determined to upset this beneficial situation by tapering off the leasing of federal land to oil and gas companies for the remainder of the decade.
The courts already blocked Biden’s effort to prohibit the issuance of new federal leases. Moreover, the so-called “Inflation Reduction Act” ties oil and gas leasing to renewable energy development. Yet the Department of the Interior still has considerable discretion to determine not just the size, but also the quality of the acreage offered to the industry. Also, new FERC guidelines will make it more difficult to construct natural gas pipelines. Because of environmental opposition in court, six of the seven planned interstate pipeline projects to transport gas throughout the East have been paused or canceled.
Incredibly, because there is insufficient pipeline infrastructure for the Northeast to get its natural gas from nearby Pennsylvania, it has been importing the shortfall from foreign countries, including Vladimir Putin’s Russia, for nearly a decade.
Adjusted for inflation, the average electricity bill increased by 5 percent between 2021 and 2022. EIA anticipated 2023 to be nominally 2 percent higher than 2022. Given what would have presented a severe strain on energy storage and capacity just two decades ago, one would have expected energy costs to be much higher at this point. Yet they remain relatively tame.
To be sure, the added electricity generation from solar and wind has helped some markets, such as Texas to rein in what should be a spike in energy costs, given the extreme and prolonged heat. Indeed, non-fossil fuels supplied 22 percent of U.S. electrical consumption in 2022.
But many technologies that fall under the renewables umbrella are intermittent, dependent upon the sun shining or the wind blowing. This is why fossil fuels will be with us for a very long time, and any talk of ditching them altogether is just fantasy. The oil and gas industries currently shield Americans from much higher prices for everything they purchase by staying far ahead of demand, producing more fuel. The need for this margin of security is not going away any time soon.
For this production-over-demand dynamic to remain, along with the steady energy costs it is yielding, a more energy-friendly (read consumer-friendly) administration would be helpful. Americans need a break in their budgets somewhere. As such, when it comes to formulating sound energy policy, government should ultimately place the needs of its constituents over those of the renewables lobby and its own ideological verve.
Brad Schaeffer is a commodities trader and author. His newest book, Life in the Pits: My Time as a Trader on the Rough-and-Tumble Exchange Floors comes out in December.