EIA Breaks Down the Winter Price Hike

The Energy Information Administration (EIA) released a handy new brochure yesterday for residential customers who are wondering why their natural gas bills are expected to soar by 44% this winter compared to last winter. Gas supply will be adequate to meet demand this winter, according to EIA, but prices and gas usage are going to increase substantially.

The brochure attributes the price increase to "a competitive market reaction as supply has lagged in its response to a recent surge in demand." EIA notes that the average wellhead price for gas was as low as $0.16 per therm (or $1.69/Mcf) in September 1998, but in September 2000 wellhead prices soared to $0.39 per therm (almost $4/Mcf). Part of the reason for the price increase is a six- to 18-month time lag between drilling and production. Although exploration and development has increased significantly in the past year, the time lag means there will be a delayed supply response to the high prices.

Meanwhile demand has soared because of new gas-fired power plants and new home construction. In addition, colder temperatures this winter compared to last winter are expected to increase gas use.

"Gas prices are expected to continue at levels much higher than last year through this winter, before coming back down after the heating season," according to EIA.

The brochure also breaks down the delivered price of gas into three components: the gas itself (34% of the total cost), transmission and storage (19% of the total) and distribution (47% of the total). EIA notes the largest portion of the delivered price is the distribution cost because of distribution requires the most infrastructure relative to the amount of gas delivered. Of the 101.5 million U.S. households, 53% use gas to heat their home. The highest concentration of households heating with gas is in the Midwest (17.9 million out of 21.6 million households). EIA estimates that Midwest homeowners will pay about $0.20 more per therm ($1.97 per Mcf) this winter than last winter.

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