If anyone knows the real reason why natural gas prices are high this summer, a time of year when prices are normally low, then that person is “on the beach making $1 million per day trading on their laptop computer,” said Phil Hardwick, spokesman for Mississippi Valley Gas.
The topsy-turvy natural gas prices are causing huge headaches for Mississippi manufacturers. Costs have gone up 90% for some customers. With many manufacturers, especially small manufacturers, working on slim profit margins, large price increases can be back breaking.
As Hardwick said, no one knows for certain why natural gas prices are so high. But there is plenty of speculation.
“There are several schools of thought,” said Howard Randolph, general manager, Williams Energy Management, Jackson. “Probably the first one would center around the increase in natural gas usage by electric generators. There has been a lot of new generation built by many different companies throughout the country, and particularly a lot in the state of Mississippi. The majority of that generation is being fired by natural gas. At a time of year that we used to put natural gas in storage, now a lot of that is being used to generate electricity. In simple terms, that is a supply-and-demand issue. The demand is higher.”
Another factor is weather. The Southeast is experiencing a heat wave that is increasing demand for electricity, and some of the additional electricity will come from natural gas-fired generators that come on line only during times of peak demand.
Randolph said another factor is that crude oil prices are also currently high. Normally industrial customers can switch to an alternate, less expensive fuel oil. With oil so high, the alternative fuel could actually be as high or higher than what they are paying for natural gas.
Joseph Sims, president of the Mississippi/Alabama Division of the U.S. Oil and Gas Association, said another reason why natural gas prices have gone up is that in the past two years, the industry has been in a slump. So there was little incentive to actively replace natural gas reserves.
“If you’re not actively exploring in the Gulf of Mexico or onshore, you are simply depleting what reserves have been found,” Sims said. “The traders recognize that in the supply-and-demand context. The traders recognize we are in a period of high demand with questions about short-term deliverability of supply. It would be the same thing if it was coffee or tomatoes.”
The concern about current high gas prices may have one silver lining. Randolph said that lots of consumers are looking for creative ways to reduce energy consumption. Some larger customers may also be considering a price hedging program to ensure a more stable price.
“The larger customers have the ability to participate in some futures-based programs that give them the ability to lock in prices,” Randolph said. “The question is, did they do it? This recent price increase in the gas sector has caught most large energy consumers off guard. Having a very warm winter certainly set the stage for prices to fall this spring and summer, and it didn’t happen. Just the opposite happened.”
Natural gas producers in the State of Mississippi are benefitting from some of the highest natural gas prices in recent history. That also increases state severance tax revenues.
“The big question for the producer is how long is that going to continue,” Randolph said. “I’ve seen prices certainly go up to levels not as high as today, but nearly as high. And I’ve seen them drop just as fast. It can go down as fast as it has gone up.”
Randolph said that he didn’t think the current high natural gas prices would be a significant concern to the merchant power plants fired by natural gas currently being constructed in Mississippi. Customers must have the electricity, and prices for natural gas or other fuels will be passed on to customers.
“They are building these facilities based on future demand needs, and that is not going to go away, especially the way our economy is growing today, and the way our economy is growing in the state of Mississippi,” he said.
It is anyone’s guess when natural gas prices might dip. It is possible for them to go even higher, as well. Weather is an important factor. An extremely hot summer followed by an extremely cold or even a normal winter would increase demand. Then there is the danger of a hurricane in the Gulf of Mexico. Shutting down production for a hurricane or hurricanes could result in temporary shortages in natural gas supplies that could increase costs.
Sims predicted that the high prices will spark more interest in natural gas exploration in Mississippi. There is renewed interest in seismic surveys and other work that is preliminary to drilling natural gas wells. The higher prices would make it more economical to drill for prospects that are deep in the ground.
“In the early 1980s, the industry was aggressive in Jeff Davis, Marion and later in Pearl River County in drilling deep natural gas wells,” Sims said. “Then the price fell off dramatically and all that stopped. But I think there is reason to be positive about those counties and for activity in Hancock, Perry, Covington and other counties.”
Sims said companies that are benefitting the most from the current high gas prices are those who drilled a gas prospect assuming a $2.50 mcf price, and instead are getting $4.50 mcf.
Despite current high prices, there is still some difficulty in attracting financing for oil and gas projects. Sims attributes that to the investment communities interest in high tech and telecommunications stocks. But Sims predicts the investments will come if prices stay high.
Contact MBJ staff writer Becky Gillette at firstname.lastname@example.org or (228) 872-3457.