Gas prices in the United States have risen to their highest in recent times. Gas shortages and rising prices have worked their way into United States’ supply chain. The energy crisis that began in late 2021 has moved into 2022. It has caused far-reaching effects on the economy, the environment, and security. Supply chain disruptions, greater interconnection of natural gas markets, and evidence of energy price volatility throughout the transition away from fossil fuels are all components of the problem.
Energy prices and availability threaten to derail the global economy’s slow recovery from the COVID-19 pandemic. The pandemic caused a historic drop in energy demand and prices. Now the recovering demand is now putting pressure on fossil fuel markets. These include oil, gas, and even coal. Prices are soaring as demand outstrips fuel supply, which has yet to recover from the pandemic drop.
Domino effect of gas shortage and prices
Energy markets are inherently price-inelastic, making them volatile. Nonetheless, the recent emphasis on the environment and affordability during the early stages of the energy transition may have resulted in less emphasis on energy security. The new interconnectedness of energy markets across fuels and geographies has also altered the spread of crises.
Measures such as strategic reserves and demand response may require more attention and programs to assist low-income consumers. They are the ones always the hardest hit when energy prices rise. Diversifying the energy supply with renewables will also help. This is because these sources, once built, are not subject to the whims of global markets.
On average, prices in the United States have climbed by 75% from the last year. However, prices in the net-consumption zones have increased by 450-500%. Liquefied Natural Gas (LNG) exports have created a global supply constraint. This has led to price rises in the United States and other locations.
Shortage throughout the globe
As in other parts of the world, gas production in the United States fell last year due to the coronavirus-driven recession and a drop in gas prices to record lows. Production has recovered more slowly than consumption because gas drillers have been cautious while the economy has rebounded strongly from the recession. A long cold winter, particularly a deep freeze over Texas, hastened the market-rebalancing process in February. As a result, gas inventories in the second half of 2020 shifted from a large surplus to a pre-pandemic situation. This with a five-year average end of the second quarter of 2021 with a deficit.
Consumption has rebounded, but output has yet to recover, and stock levels have been rapidly depleted across Europe and Asia due to a long, harsh winter. The situation is not nearly as bad in the United States, which benefits from a sizeable domestic gas production base, but supply remains tight compared to recent years.
Since May 2021, US futures prices have risen exponentially, and the market has swung into an increasingly wide backwardation since July 2021. The six-month calendar spread reached its greatest backwardation in at least ten years in October 2021, reflecting the relatively low level of inventories.
Status of natural gas
Historically, global supply crises have been limited to oil, but fast-changing natural gas markets are also in crisis. A growing and more flexible liquefied natural gas (LNG) market had allowed global gas supply competition. This was not possible when gas was supplied via pipeline or LNG under long-term contracts. Europe and Asia compete for the same LNG supply, driving up prices in both markets and extending the current tight market to the United States.
For all of its success, natural gas has had certain drawbacks. For economic or environmental reasons, coal-fired power generation has been displaced by gas-fired generation.
Lagging in production
Working gas inventories in underground storage are lowest since 2018 and even lower than in 2014. Asian and European markets are now receiving large quantities of LNG from the United States. As a result of gas shortages in Europe and Asia, higher prices and higher export volumes have resulted, helping to push up prices in the domestic market in the United States. Higher prices will eventually lead to more gas drilling and production.
The United States’ output has been slowly recovering from its cyclical low in mid-2020. Of late, it has increased at a compound rate of less than 0.6% per year over the two years.
Back to coal
A surge in energy prices has prompted power companies to reduce their gas-fired units. They have begun using coal-fired generators to reduce demand. As coal-fired generation in the United States declines, an essential buffer for gas demand and prices is disappearing. Coal can no longer generate electricity when natural gas demand is high. Therefore, gas demand is becoming less elastic and prices more volatile.
In September 2021, the cost of gas for power generation rose to nearly $5.30 per million Btu on an energy-equivalent basis, compared to just $2.00 for coal. In practice, modern combined-cycle gas generators convert the Btu of energy contained in the fuel into megawatts of electricity about 30% more efficiently than traditional coal-fired steam generators.
Gas prices can thus rise by approximately 30% more than coal prices before electricity generators have an incentive to reduce the hours of gas-fired units in favor of coal-fired units. Gas is now more than twice as expensive as coal. So there is a strong financial incentive to limit gas combustion and use coal whenever possible.
There have been indications that high gas prices and fuel switching have begun to aid in the rebuilding of domestic gas inventories. The disparity between gas inventories and the pre-pandemic five-year average has shrunk from more than 7% in early September.
Gas shortage and prices in the United States
The slight improvement in inventory position has reduced the shortage in gas. This is most likely responsible for the recent decline in gas prices in the United States. However, stocks remain relatively low. There is an entire winter heating season ahead. The continued strong draw on exports from Europe and Asia will ensure that prices will be high.
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