The colder weather is coming, and that means natural gas prices are on the rise. In some parts of the country, prices have quadrupled in recent weeks as demand for natural gas spikes.
Per the Winter Fuels Outlook by the U.S. Energy Information Administration, the cost to heat a home will increase 30% compared to last year. The number of heating degree days is expected to increase 2.6 percent this winter, compared with last year’s winter.
The Industry’s Story
The oil and gas industry is quick to blame the government for these price increases. They say that increased regulations and taxes are making it more expensive to produce natural gas.
Environmental advocates, on the other hand, say that the industry is simply trying to pass along its high costs of doing business to consumers.
What’s the truth?
The Government’s Story
While it’s true that natural gas production has hit record levels, there are several factors involved in its cost. Here are just a few examples of what oil and gas companies are facing these days.
Increased demand for fracking is overloading pipelines, which means producers have to charge more for natural gas.
The industry is also facing a lot of litigation over water contamination and other environmental problems.
In addition, the industry is dealing with new regulations from the Environmental Protection Agency (EPA) that are increasing costs.
For example, the EPA has just finalized a rule that would limit methane emissions from oil and gas operations. Methane is a potent greenhouse gas, and the new rule will help to reduce its emissions by up to 45%.
Unsurprisingly, the oil and gas industry is not pleased with this regulation. It’s suing to block it, in fact. The EPA, however, says the methane rule is “a key part” of former President Obama’s Climate Action Plan.
While this new methane regulation imposes costs on the oil and gas industry, there are also opportunities for companies that support natural gas development.
In short, while the oil and gas industry does have a lot of moving parts, government regulations are only one piece of the story.
While it’s true that many different factors impact natural gas prices, including increased demand for fracking and court cases over environmental damage, there is another big factor in play here: the cost of doing business.
While industry advocates blame government regulations, the fact is that production costs are going up across the board. This includes everything from labor costs to the cost of materials.
It’s also worth noting that natural gas prices are still relatively low compared to other forms of energy. In most parts of the United States, electricity prices still cost about twice as much, on average. Oil is also more expensive than natural gas.
So, while the coldest days of winter may be yet to come, the political fight over natural gas prices has been going on for some time.
The current oil market is experiencing a major shift brought on by advances in technology that have opened up previously untapped opportunities.
One of the main changes is the U.S.’s ability to extract oil from shale, which has led to an unprecedented boom within the last decade. Shale oil extraction has caused U.S. production levels to grow exponentially since 2006 and it is now the world’s largest producer of oil.
Why, then, are oil prices so high when the U.S. is producing so much?
There are a few reasons for this:
1) The global demand for oil continues to grow, especially in developing countries, as they strive to increase their standard of living.
As a result, the global demand for oil has risen almost consistently over the last decade. New technologies have made alternative forms of energy appear more competitive in the market, but they still have not been able to fully supplant oil.
2) The U.S. is not the only country with shale oil reserves and other countries are beginning to extract their own shale oil, which has led to a decrease in U.S. market share.
Other countries, particularly China, are becoming larger oil producers. These countries have not yet reached their peaks in shale oil extraction, so production levels are expected to continue to grow in the future.
3) The break-even price for shale oil production is much higher than traditional production, so companies are forced to sell at a price where they are still making a profit.
When you say break-even price you are referring to the point at which expenses are equal to revenue. For shale oil, this is right around $50/barrel. This means that companies need to sell their oil at a price above this in order to make a profit.
4) OPEC, an organization of oil-producing countries, has maintained consistent production levels in order to keep the price of oil high in hopes that alternative energy will not be able to compete with oil’s market share.
In a recent report, OPEC released its projections for the future of oil and they do not believe that oil will be unseated by alternative energy in the near future, so they are trying to maintain a high price point.
These four major factors have caused the oil market to be in a state of flux for the last few years, and it is unclear how things will play out in the long term.
What is clear, however, is that the U.S. shale boom has transformed the global oil market and will continue to have a major impact for years to come.