No Natural Gas Shortage This Winter, AGA Expert Says

PRICES WILL BE HIGHER, but there will be no natural gas shortage this winter, says AGA Director of Gas Supply and Transportation Chris McGill.

"Our members are telling us they are finding gas in the marketplace," McGill reports. "There is no shortage. But gas will be more expensive."

How expensive? McGill says the Energy Information Administration's estimate that residential prices will be about 25 percent higher than last year is in line with what AGA has been hearing.

The explanation lies in "two words we're going to hear over and over this winter heating season: supply and demand," McGill says. "It's fundamental economics. Over the past several years we've had a really robust economy, and even with the fairly warm winters we've had solid demand for gas. And there's the issue of additional natural gas going to electric generation although it's unclear how much is going there."

But in the midst of that demand picture, the market two years ago was well supplied with gas, and robust gas-on-gas competition drove the price below $2 per thousand cubic feet (Mcf), McGill notes. At that price, producers, especially small independents, "basically stopped drilling," he says.

With prices now over $5 per Mcf, drilling has increased dramatically, with more than 800 rigs now drilling for gas compared with 360 when prices were at their low point, McGill notes. "Do we need $5 gas in the future?" McGill asks. "Most people think that's too high. The question is, What is the new paradigm? Where is it going to settle?

"I think everybody expects natural gas prices to moderate over time," McGill continues. "Most expect that today's prices will be around for most of the winter heating season, but by mid- or late 2001, we'll see the impact of this new drilling and some other very positive supply elements, and we'll see prices fall off somewhat."

McGill took issue with analysts who make a direct link between relatively low storage levels going into this winter and higher prices. "It may be that the gas in storage actually moderates the price somewhat," McGill says, "because it may have been put in at a price that's lower than what we're seeing today."

Return to American Gas Magazine

Subcribe to American Gas