Why Have Natural Gas Prices Risen So Much?

The average wellhead price for gas was as low as $0.16 per therm, or $1.69 per thousand cubic feet, in September 1998.  In September 2000 prices soared to $0.39 per therm or almost $4.00 per thousand cubic feet.  This increase reflects a competitive market reaction as supply has lagged in its response to a recent surge in demand.

The latest Energy Information Administration assessment, issued in early December, projected that Americans heating with natural gas would spend at least $300 more this year on heating costs compared to last year.  At the same time, natural gas prices on the commodities market were reaching $10 per thousand cubic feet, four times the cost of gas last year. 

Although gas exploration and development have increased significantly in the past year, the response to the increased drilling for gas has yet to be fully reflected in sufficient additional supplies to affect prices.  This is due to the 6 - 18 month lag time between the time of initial drilling and when additional production is brought to the market.

Natural gas demand in 2000 has increased because of a number of factors, including the start of operations at new gas-fired electric-power generators and new home construction, which tends heavily toward the use of natural gas for heating and cooking.  Natural gas prices are expected to continue at levels much higher than last year through this winter, before coming back down after the heating season.