The Unnatural Effects Of Natural Gas

Lately,
when I’d ask experts about the future of electricity, they’d end
up talking about the price of natural gas. That never made sense
to me: coal and nuclear power produce nearly three-fourths of the
electricity in this country. Natural gas fuels less than one-fifth
of the electricity in the U.S. Kentucky gets almost all its
electricity by burning coal.

If ever there was a case of
the tail wagging the dog, natural gas seemed to be wagging
electricity. When natural gas and some electric bills rose during
December’s cold snap, the mystery seemed especially pressing.

To find answers I drove to
East Kentucky Power Cooperative, in Winchester, to talk with Randy
Dials, the fuel procurement manager. East Kentucky generates and
transmits power to 17 electric co-ops in the eastern part of the
state, and with energy prices so much in the news, Randy’s job
puts him in the middle of the action.

He says that to understand the
role of natural gas you have to go back to the mid-1990s when the
economy was growing steadily with a low inflation rate. But two
ominous energy trends were about to put the laws of supply and
demand into effect. One was that natural gas prices had stabilized
for a few years at around $2.50 per million cubic feet. That was
good for consumers, but a weak incentive to drill for more. The
number of rigs drilling for natural gas in the United States fell
from more than 600 in 1998 to less than 400 in 1999. Result:
lower supply.

The other trend involved new
patterns of electricity use. Utilities found they were
increasingly having to provide electricity for especially heavy
"peak" use of electricity, like for a few days in the
coldest part of the winter or hottest part of the summer. Rather
than build large power plants to meet those peaks, it made more
sense to install smaller, less expensive turbines that might
operate only a few days a year. Those turbines were powered by,
you guessed it, natural gas. In Kentucky, use of natural gas by
electric utilities tripled from 1996 to 1999. Result: higher
demand.

Normally the larger natural
gas users put gas into storage during warm weather, for use when
demand is stronger. But during the past couple of years, as prices
inched up and mild winters seemed to be the norm, it seemed
smarter to sell the gas rather than store it. Reserves of natural
gas declined to below-normal levels. Result: lower supply.

Then last summer oil prices
shot up. Consumers in situations where they could choose to use
either oil or natural gas, suddenly found that gas was cheaper, so
they switched. Result: even lower supply.

But as December temperatures
fell to near-record lows, people kept their heaters on. To provide
enough electricity, utilities fired up their natural gas turbines.
Result: higher demand.

With natural gas in short
supply, prices shot up to near $10 per million cubic feet,
affecting electricity prices as well as businesses and homes that
used natural gas directly.

By this spring events calmed
down, and natural gas prices moderated to around $5 per million
cubic feet. The number of rigs drilling for natural gas rose to
more than 800, an all-time high.

The U.S. Department of Energy
predicts plenty of natural gas will be available for the next 20
years, and that prices will stabilize, but stay slightly higher
than recent history, as natural gas production moves from the
easiest fields to ones harder to reach.

As for the use of natural gas
by electric utilities, that’s much harder to forecast. It depends
on what happens with environmental regulations, proposals to
deregulate the electricity industry, the economy, and the weather.

-Paul Wesslund