Tighten your belts

After the double whammy called Katrina and Rita, the natural gas production in this country has taken a massive hit. It’s not news you’ve yet seen above the fold in most newspapers, but you probably soon will.

Eighty percent of the natural gas consumed in the United States comes from the Gulf states region. Another 15% comes from Canada, and the remaining 5% is imported liquid gas. Currently 80% of the natural gas production in the Gulf region is still shut down. Of the natural gas processing facilities in the region, several were damaged by Rita and will remain off line anywhere from a week to a couple of months. Further, the Henry Hub is shut down, under water, and without electricity.

Henry Hub, a wholly owned subsidiary of ChevronTexaco, located in the southwest corner of Louisiana, interconnects nine interstate and four intrastate natural gas pipelines. From there the gas is piped to the Midwest, Southeast, Northeast, and the Gulf states. Henry Hub is also the pricing point for NYMEX (New York Mercantile Exchange), which determines the price for the majority of the natural gas contracts in the country. Even suppliers that do not move their natural gas through Henry Hub often will set their prices according to NYMEX prices. With the Henry Hub shut down, little natural gas is making it to the rest of the country. That not only creates potential short-term shortages, but sends natural gas prices spiraling upwards.

Worse, on September 22, Henry Hub declared something called force majeure which means that, as a result of a natural catastrophe, all remaining September natural gas delivery contracts were canceled and October natural gas delivery contracts are on a wait and see basis. NYMEX also declared force majeure the following day. Along with delivery, the cheaper prices that were set for September went out the window and early-October contracts are not looking much better. Unless Henry Hub is brought back online within the next week or two (along with more of the damaged processing facilities), high natural gas prices may be the least of our worries.

As of yesterday, natural gas prices closed on the Mercantile Exchange at $14.20 per 1000 cubic feet. Since 1000 cubic feet translates into 10 therms, the cost of gas per therm is $1.42. Compare that with the price of natural gas last year at this time when it was selling for about $8.00 per 1000 cubic feet or $.80 per therm. Many energy analysts are calling for natural gas prices to rise to $20 per 1000 cubic feet by December.

The price people pay, at least for part of this winter, will vary from locale to locale— from much less than the current NYMEX set price to roughly the same. Much depends on how much natural gas utilities purchased in the spring and early summer at cheaper prices, how many power plants serving the locale operate on natural gas, how hot the summer was (creating huge surges in electricity demand for cooling), and how mild or cold this winter will be. The faster the cheaper gas is burned up, the sooner we get to the higher prices.

And, of course, a lot also depends on how long the gas supply in the Gulf is shut down.

To give an idea of what people in the northeast may be facing this year, here is an example based on 100 therms of usage:

Based on last year’s natural gas prices, homeowners using 100 therms in November probably paid something close to $.80 x 100 = $80.00
Based on current natural gas prices, homeowners might expect to pay (long about November) $1.42 x 100 = $142.00

Keep in mind that this is only the cost of the natural gas used, without the add-ons of delivery costs and minimum service charges for just having the service.

If I may ask a favor—if you can, would you please consider donating an extra $5 or $10 toward your gas utility’s fund to help those who will be hard hit by the high prices? I know many utilities maintain these funds. If yours doesn’t, please try to find an organization that will help folks with their winter utility bills.

~~~~~~~~~~~~~~~

Sources
Natural gas prices set records
What is Henry Hub
NYMEX’s declaration of force majeure
Portions of Henry Hub still under water, making progress
Northeast looking expensive for November
Energy Conversion Factors