Record Gas Prices from Lack of Pipelines

February 18, 2014

A lack of pipelines to deliver natural gas to the northeast is leading to record prices, says BusinessWeek.

Pennsylvania is rich in natural gas, as the state is home to the Marcellus Shale -- the largest natural gas field in the country. But pipeline companies have yet to connect those gas fields to utilities in the Northeast, leaving Northern cities to pump gas from the Gulf Coast instead.

  • On January 22, New York City's temperature dropped down to seven degrees. But the cost of delivering natural gas to the city had just increased to a record $123 per thousand cubic feet the day before. Consumers, as a result, saw their heating bills go up.
  • But in Pennsylvania's Marcellus Shale -- the largest natural gas field in the country, just 100 miles away from New York City -- the same amount of gas was a staggering 35 times less than the New York price.
  • New England's electricity prices are especially high because power plants have gone from using natural gas for 30 percent of their electricity to 52 percent today. But this increase has come without any new pipeline construction, and prices have only gotten higher -- and more frequent -- from year to year.

Ten pipeline projects are currently underway to deliver gas from the Marcellus Shale to the Northeast and the Mid-Atlantic, but five of those will not be completed until the end of 2018.

  • The $123 per thousand cubic feet price seen in New York City a few weeks ago was from the natural gas "spot" market.
  • Most natural gas is purchased on a long-term, contractual basis, shielding customers from the effects of large price spikes.
  • But when demand skyrockets unexpectedly and a utility company has to purchase more gas, it must purchase from the spot market and pay the going price for gas in the area.

Businesses have also been affected by the high prices. Many smaller manufacturing plants also purchase gas on the spot market rather than using futures contracts. As a result, the cold temperatures and corresponding price spikes have many plants operating below capacity, and some have even shut down.

Source: Matthew Philips, "Northeast's Record Natural Gas Prices Due to Pipeline Dearth," BusinessWeek, February 6, 2014.

 

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