What is the Future of Natural Gas Prices?
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Similar to Crude Oil, natural gas also falls into the category of fossil fuel, and we rely on them for our daily energy uses in different sectors for our economic growth. There are also supply-side and demand-side factors that affect the prices and usage of natural gas. Many countries are initiating policies on promoting renewable energies, which may affect the usage of natural gas to some extent. In this passage, I will first analyze the supply side factors of natural gas, then I will make a transition to the demand side and finish up with governmental policies before making a 5-year prediction on natural gas.
Supply
The first thing on the supply side is the production of natural gas. There are many countries in the world producing natural gas. The US and Russia are at the top of the list. Pipelines for transporting natural gas are major infrastructures for suppliers to ship their gas into different regions. We have heard the news that Russia “cut off a key natural gas pipeline to Germany” (“ European energy prices soar after Russia cuts off a natural gas pipeline to Germany”) and other major EU areas are also affected. This has caused the natural gas price to increase sharply due to the supply shortage as Russia is not transporting gas to Europe at full capacity.
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Many EU countries are finding alternatives for gas suppliers. In theory, the US could export its natural gas to EU countries. But there is a shortage of gas transportation infrastructures. Within the US, even though gas firms want to increase their production, “the Permian Shale, the nation’s second-biggest gas supply basin’s production growth could slow significantly next year unless firms start building new pipelines soon” (“ U.S. natural gas production growth wanes as the need arises”). We can see that the production of natural gas is highly dependent on investment in infrastructures like pipelines and the nation’s will to export and import.
Besides production and trade, gas storage is also an important factor on the supply side. Following the Russian invasion of Ukraine, the EU has seen a shortage of natural gas in its storage units compared to the 2017-2021 Average (Reuters Graphics). Usually, the gas storage is around 35% – 50% full between March and April, but the gas storage was around 20% – 35% full this year. That’s a sharp decrease from previous years and low storage also caused the price to increase substantially as the public has a growing concern about the possibility of running out of gas due to shortage on the supply side.
Demand
After taking a close look into the supply side, we can shift our attention to the demand side. Natural Gas accounts for 38.3% of electricity generation in the US in 2021 (“What is U.S. electricity generation by energy source?”). Weather is one big demand-side factor of natural gas. We may use more electricity for cooling if the weather is hot, and may use more electricity for heating if the weather is cold. In recent years, “scientists are detecting a stronger link between the planet’s warming and its changing weather patterns” (“Extreme weather gets a boost from climate change”).
Climate Change
That being said, global warming could be a potential reason for the growing cases of extreme weather events across the globe. More extreme weather could lead to more demand for natural gas as consumers have a higher need for electricity to heat and cool. Higher demand may also place a burden on the grid, as recently California residents receive alerts on their phones to limit the use of electricity due to extreme heat.
Economic Growth
Another demand-side factor is economic growth. It is common sense that economies need more sources of energy consumption when they are at full capacity. Many industries in the economy need to use natural gas for their production of goods. Natural gas can be widely used as “fuel to manufacture products such as paper and glass; raw input material to produce substances such as hydrogen for clean energy” (“Industrial Uses of Natural Gas”) and industrial fertilizers. In a growing economy, industrial goods are generally high-demand products, which indirectly increases demand for natural gas as it serves as the input source.
Speaking of industrial uses, substitute energy sources are also a factor in the demand for natural gas. Many industrial companies can choose from a variety of energy sources to fulfill their powering or manufacturing needs. They can compare prices across gasoline, coal, etc. before making a final decision on which energy source to utilize (“Natural gas explained”). For instance, if a car manufacturer finds that coal is cheaper than natural gas in a specific timeframe for their production, then they may be in favor of coal instead of natural gas if we are not considering the environmental costs.
Government
Moving forward, governmental policies also play an important role in the demand and supply of natural gas. In the US, the government is aiming to be carbon neutral by 2050. The government may impose policies to limit the use of natural gas and adapt to renewable energy step by step. For instance, California residents are introduced to switching over to an electricity plan that is made from 100% renewable energy. Although the price difference still exists, we can see in the blueprint that the government is taking action to get on the path of renewable energy. As renewable energy keeps developing and closing the price gap with traditional fossil fuels, the demand for natural gas will start decreasing in countries that take climate change and environmental policies seriously.
However, natural gas may still be an important power source in developing countries as it is relatively cheaper for them compared to renewable energy in the next decades and it takes time for them to build renewable energy plants as most countries do not want to sacrifice their economic growth path for the decarbonization goal. Even though natural gas may not emit as much carbon dioxide as other fossil fuels like coal, it still presents an obstacle for the country’s initiative to be carbon neutral by mid-century. We may see the demand for natural gas fall once renewable energy becomes the major energy source. However, natural gas is still the leading energy source in the next five years and the demand will still remain high.
Looking Ahead
On the supply side, natural gas firms may start producing more gas in the next five years as demand may rise following the economic recovery from the pandemic and extreme weather. However, key investments in natural gas pipelines and other major infrastructures are needed for the efficient delivery of natural gas. We are unsure how the supply–side of natural gas may change in the next five years. It depends on the construction of major pipeline infrastructures and natural gas exporting country’s political policies.
On the demand side, demand for natural gas will probably increase in the next five years. Natural Gas is a perfect energy source for the transition to renewable energy as “gas infrastructure could be repurposed for low-carbon fuels such as hydrogen and biogas” (“Global Energy Perspective 2022”). Natural Gas emits less carbon dioxide than other major fossil fuels like coal. And it can play a transitional role in renewable energy, which may increase the demand in the transitional phase.
In addition, many countries are recovering from coronavirus. And as a result, economies are starting to recover to full capacity slowly. So the demand for natural gas will also increase as economic activity is increasing. Prices for other fossil fuels and extreme weather are less predictable and may fluctuate from year to year. However, the general picture on the demand side will not change. Furthermore, it will increase most likely in the next five years. On the other hand, the supply-side of natural gas will mainly depend on investment in major natural gas infrastructures.
Written by Yiyang Chen
What is the Future of Natural Gas Prices?
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Works Cited : What is the Future of Natural Gas Prices?
“Extreme Weather Gets a Boost from Climate Change.” Environmental Defense Fund, www.edf.org/climate/climate-change-and-extreme-weather.
“Frequently Asked Questions (Faqs) – U.S. Energy Information Administration (EIA).” Frequently Asked Questions (FAQs) – U.S. Energy Information Administration (EIA), www.eia.gov/tools/faqs/faq.php?id=427&t=3.
Global Energy Perspective 2022 – McKinsey & Company. www.mckinsey.com/~/media/McKinsey/Industries/Oil%20and%20Gas/Our%20Insights/Global%20Energy%20Perspective%202022/Global-Energy-Perspective-2022-Executive-Summary.pdf.
“How Much of Europe’s Gas Storage Is Filled.” Reuters, Thomson Reuters, graphics.reuters.com/UKRAINE-CRISIS/EUROPE-GAS/zdvxozxzopx/.
“Industrial Uses of Natural Gas.” NGSA, www.ngsa.org/industrial-uses-of-natural-gas/.
Northam, Jackie. “European Energy Prices Soar after Russia Cuts off a Natural Gas Pipeline to Germany.” NPR, NPR, 7 Sept. 2022, www.npr.org/2022/09/07/1121427456/european-energy-prices-soar-after-russia-cuts-off-a-natural-gas-pipeline-to-germ#:~:text=Throughout%20Europe%2C%20energy%20prices%20have,natural%20gas%20pipeline%20to%20Germany. Person, and Arathy Somasekhar Scott Disavino. “U.S. Natural Gas Production Growth Wanes as Need Arises.” Reuters, Thomson Reuters, 2 May 2022, www.reuters.com/business/energy/us-natural-gas-production-growth-wanes-need-arises-2022-05-02/.
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What is the Future of Natural Gas Prices?
