Natural gas prices stay flat, despite demand

September 14, 2011

The basic economic laws governing supply and demand are being proven once again by natural gas prices, reported Wabash Valley Vice President, Power Supply Lee Wilmes. Despite the steadily growing demand for gas, prices have remained flat. Why?

“Normally when there’s more demand for any commodity we’ll see upward pressure on prices,” Lee explained. “But right now, we are seeing unprecedented increases in supply that are sustaining the sub-$5/MMbtu price.” He attributed the growth in supply to increased production of natural gas from shale deposits.

“We continue to be surprised at how the supply is continuing to grow at these historically low prices,” Lee added. “Nobody really knows how much production is really going to be out there.” Gas production is also affected by oil prices, he explained. “When oil prices increase, drillers will jump from natural gas to oil production, so they can make more money. For a while, we’ve been seeing that the growth of investment new in natural gas wells was declining, because drillers were using their capital and resources to pursue oil.”

Demand for natural gas is likely to increase dramatically as the provisions of EPA’s new Cross-State Air Pollution Rule take effect, Lee said. “The rule will result in reduced coal generation, and most of that will probably be replaced by natural gas-fired plants. There are some more efficient coal plants out there, but that’s just a fraction of them. We have a pretty good infrastructure both to transport natural gas and to move electricity.”

The one potential fly in the ointment is concerns about the environmental impact of shale gas production. “If environmental concerns cut production of shale natural gas, that would be likely to increase market prices,” Lee added.