What happens when supply is not meeting demand, production takes time to come online, inflation has been creeping up, and speculators catch wind? A price eruption. And that's exactly what we are seeing with natural gas prices here in the United States as we head into winter.
The price of natural gas is up 180% over last year, and forecasts indicate an upward trend throughout the winter months. With about half the homes in the United States using natural gas to heat their homes and water, this could be a concern for many. Homeowners are already feeling the sting of inflation for the first time in decades, and throwing this into the mix will just add fuel to the fire, so to speak.
But don't panic just yet -- for many reasons, the United States is not in the same position as the European Union with regard to the current energy crisis. Read on to understand what caused this surge in natural gas prices and how long experts expect this to last before things settle back down so that we can all rest a little easier.
What is pushing up the price?
A perfect storm of events is at play in the energy market right now. Since the shale revolution, the United States has been not only self-sufficient but also a major exporter of natural gas. So, how did we get into this mess?
Believe it or not, due to the abundance of natural gas that was available with the widespread fracking, it actually cost the producers money to sell it at market. With tons of supply and extremely low prices, very little was kept as reserves. Since the pandemic began, supplies have been whittled away even more, especially now as consumer demand is finally starting to return to normal levels.
Inflation hit 4.5% in the latter half of this year, which we haven't seen since the early 1990s. This increases the costs of goods -- everything from a loaf of bread to a theme park ticket to natural gas now costs more. But it's not enough on its own to create the sky-high prices we are seeing. Speculators caught wind of diminishing reserves as we were heading into winter and placed their bets. It has quickly driven the spot price of natural gas as a commodity up high.
The Henry Hub benchmark price is predicted to hover around $5.67 per MMBtu (million British thermal units) until spring of next year. This is the highest winter prices we have experienced since the winter of 2007-2008. Add this speculation to the rising inflation rate and low supply, and you get to the price increases of nearly 200% that we are now seeing and predicting.
How long will this last?
Luckily, in their October Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) predicts it should level out fairly quickly. The EIA is indeed calling for even higher prices as we head into winter.
Spot prices -- the market prices for which commodities like gold, timber, oil, or natural gas (as in this case) are bought and sold for immediate delivery to consumers -- are predicted to near $6 in the first couple of months in 2022. But by early spring, the STEO is calling for prices below $4. A quick and dramatic return to more average prices.
Will your heating costs go up this winter?
Thankfully, utility companies purchase gas with contracts years out, meaning prices should remain mostly stable even though the physical price right now is sky-high. Utility bills will likely increase some due to inflation, but the average consumer will not be paying the prices that the spot market is going for.
Also, though the reserves have dwindled, it is not at all likely that the United States will actually run out of natural gas like many countries in the EU are currently experiencing.
Remember that we are a major exporter of natural gas and are not reliant on political relations or delivery from an outside source. With that in mind, you can rest assured that blackouts and utility bills to match the spot market are not realities with which homeowners must concern themselves.