American homes that run on natural gas can expect hefty bills this winter.
How high prices rise depends on many factors, including whether the war in Ukraine is taking a new turn and whether the winter is unusually mild or cold. The Energy Information Agency winter forecast expects higher bills than last year, although not quite as high as summer.
The war in Ukraine and Europe’s ban on Russian gas have already reshaped global markets. Europe is feeling the pinch because much of its gas comes from Russia, but the US faces a different kind of problem.
through most In the 2010s, the US had a supply glut that kept the wholesale price of gas low. Supply far exceeded domestic demand, and almost none of it was exported to other countries as liquefied natural gas (LNG). But since 2016, the US has been building new terminals capable of exporting gas in its more condensed liquid form. Increased exports have raised costs for American consumers as they compete with global markets that generate better profits for the industry. Add in the cost of inflation and extreme weather disasters like Winter Storm Uri, and it looks unlikely that prices will fall for long.
Now that the US is increasingly exposed to the vagaries of the global market, the pitfalls of a gas economy are becoming more apparent.
Gas export drives up prices
Until recent years, the main consumers of gas were industry, the electrical sector, as well as households, businesses and vehicles. As LNG exports have increased, they have essentially “put pressure on the rest of those U.S. markets, particularly residential,” explains Clark Williams-Derry, an energy analyst at the Institute for Energy Economics and Financial Analysis (IEEFA).
Like the gasoline you pay for at the pump, there is no universal price for natural gas. The next indicator we have for this in the US is called the Henry Hub, a wholesale price named after a busy distribution location in Louisiana. If you look at what happened to Henry Hub prices, you can explain the weirdness of the US gas markets right now.
The Henry Hub is not what you pay for. Until the gas reaches the home, you pay for the fuel distribution, pipelines, and associated labor. Regulated utilities generally charge consumers for the gas they use and then a fixed price, the cost of building pipelines to deliver the gas. These costs are also increasing thanks to inflation housing prices rising even faster than the Henry Hub would indicate.
That Henry Hub Prize has been so low for most of the past decade that manufacturers have struggled to stay in business. By 2016, the US had opened its first liquefied natural gas terminal in Louisiana, which allowed it to condense the gas so it could be exported to other countries. The opening coincided with a momentous decision made in 2015 to lift a 40-year-old ban on crude oil exports. To stave off another government funding showdown with the GOP-controlled Congress, President Obama signed legislation that meant the US could begin shipping oil to foreign markets at a better price than domestically.
The US has taken some time to ramp up its export capacity with a pandemic mixed into the equation, so the impact on markets has taken time to catch up. However, economists, including those at the EIA, agree that these terminals are having an impact on domestic prices.
An unexpected event this summer showed how important exports have become in determining US gas prices.
In June there was an explosion at the second largest natural gas export facility, Freeport LNG, a facility designed to convert gas into its liquid form so it can be shipped across the ocean. The facility responsible for 20 percent of US LNG capacity since closedwhich reduces the export capacity by a few percentage points.
Henry Hub’s prices were skyrocketing at the time of the blast, but even the 2 percentage point dip in overall US gas consumption was enough to make an obvious difference. The terminal has faced a number of delays in reopening, but if it does, it will once again shift domestic gas supplies. Two percentage points may not sound like much, but there isn’t much room to maneuver since the pandemic in oil and gas supply and demand. As the explosion showed, changing the wholesale price of gas is enough. In fact, the EIA expects prices to continue rising “when the Freeport LNG terminal in Texas” resumes partial operations as more gas is exported.
The pressure will only increase as the US continues to build more of these terminals. When they ramp up, LNG exports are forecast double from 2020 to 2023 levels. Typically, these terminals are subject to years of environmental reviews and approvals, but Republicans and some Democrats have pushed for expediting those deadlines. Some progressive Democrats have pushed for the Biden administration to clamp down on LNG exports altogether, fearing it will not only drive higher prices but lock the world into decades of consuming fossil fuels it cannot afford .
“There’s no point where you build enough infrastructure to somehow isolate yourself from global markets,” said Lorne Stockman, research director at climate group Oil Change International. “There are times when supply catches up with demand and prices fall, but demand inevitably starts to catch up with supply again. It’s like a hamster wheel.”
You will be charged more due to the epic extreme weather
Henry Hub’s prices have fallen since August, but private customers haven’t felt much relief. Mark Dyson, executive director of the zero-carbon electricity program at energy think tank RMI, pointed to another reason: extreme weather.
In February 2021, Texas was surprised by Uri, an unusually violent one winter storm. Unprepared for the cold temperatures, the state’s independent power grid suffered massive blackouts as gas infrastructure froze and demand for heating soared.
The supply shortages this time were the result of the weather, not international conflicts, but the effect was the same as that of the war: prices soared. The combination of these things could have hypothetically turned a $200 bill into a $10,000 bill. To avert that catastrophe, utility regulators instead let companies spread the cost of the storm over a longer period of time — like this Consumers, not just in Texas but also in Colorado and Minnesota, could pay for the storm over the next decade.
The problem is that Winter Storm Uri may not have been a one-off fluke, but an event that is becoming more likely due to climate change. It’s harder for scientists to link a single cold weather event to climate change; some research suggests that warming in the Arctic increases the likelihood of polar air flowing south.
Energy efficiency and clean electricity help us to get off the “hamster wheel” of rising energy prices
There is a valuable lesson to be learned from this summer’s Freeport explosion. Just as a large LNG terminal going offline can make a difference in domestic prices, so can other things. Energy managers immediately point to more production as a solution, even though it creates all sorts of other global warming problems. The methane from natural gas is used as a fossil fuel heats the planet much faster as carbon dioxide.
Stockman suggests it’s time to get off the hamster wheel of trying to drill our way out of high energy prices. “The most important thing that will make energy cheaper and safer for Americans is to reduce and eventually phase out our use of these resources,” Stockman said.
Here the policy of Anti-Inflation Act can make a difference — not in time for this winter, but potentially as early as 2024. One is a fee for excess methane emissions that escape from drilling and transporting natural gas, which could finally spur producers to use more of the lost gas gain overheating of the atmosphere. Another reason is the range of excise tax breaks that incentivize home energy efficiency, including energy efficient appliances such as heat pumps. Finally, utilities and consumers alike are facing new incentives to buy renewable energy over gas, clearly tipping the economy in favor of solar and wind.
“We’re going to see the level of adoption over the next 12 to 24 months that’s going to result in a pretty big dent in gas demand over the Centre County Report term,” Dyson said. “Even a few percentage points drop in gas demand from power, buildings and industry could actually have a pretty big impact on prices. It could actually lower the prices we’re seeing now.”