Ken Silverstein EnergyBiz Insider Editor-in-Chief

It's not that consumers and industry are fickle. It's just that when energy prices rise, people and enterprises adjust their usage or switch to alternative fuels. If prices go high enough, it spawns interest in new development of existing resources or the innovation of totally different ones. That's the nature of free markets, although government policy is an inextricable component of the process.

The price of natural gas now stands at about $6.50 per million BTUs on the New York Mercantile Exchange compared to last December when it had risen to almost $15 per million BTUs in the wake of Hurricane Katrina and reduced production in the Gulf of Mexico. In the early 2000 time frame, the price was $2-$3 per for the same unit.

"But make no mistake, the natural gas crisis hasn't gone anywhere," says American Chemistry Council CEO Jack Gerard. "Natural gas costs continue their march upward, American jobs are being shed by the millions, and the nation's economy and security remain at risk -- due in large measure to current federal energy policies."

For the time being, however, consumers will pay less. The U.S. Energy Information Administration (EIA) says that households heating primarily with natural gas will pay roughly $826 this winter. That's down 14 percent from last year's record of $945. Comparatively, natural gas consumers spent an average of $465 in the winter of 2001-2002 and $741 in 2004-2005.

Where are prices headed in the future? No one has a crystal ball. High prices mean greater margins for producers and so over the last three years drilling levels have increased and thereby upped supplies. That, in combination with diminished demand, has deflated the present cost of home heating.

Besides the laws of supply and demand, the current price of natural gas is also attributable to the fact that the National Weather Service is predicting a warmer than normal winter. As a result, there's a lot of natural gas sitting in storage right now. At last count a few weeks ago, 3.25 trillion cubic feet was stockpiled. That's 11 percent more than last year.

"This is close to EIA's estimated maximum working gas storage capacity of about 3,600 trillion cubic feet, which should put downward pressure on natural gas prices, at least until cold weather sets in and inventories begin to drop," the EIA said in its monthly Short-Term Energy Outlook.

Economic Laws

Natural gas, of course, became the fuel of choice in 1990 after amendments to the Clean Air Act passed. And for at least a decade, all power plants on the drawing board were to be fueled with the commodity. Demand soared. But, production did not. And prices rose.

In its "Accelerated Depletion: Impacts on Domestic Oil and Natural Gas" study released in 2001, the EIA said that if the original 30 trillion cubic feet demand projection is to reach fruition by 2025, then the price of gas would have to remain less than $3.25 per million BTUs. It also said that producers would need to maintain high levels of drilling and have access to basins off the Florida coast and in the Rocky Mountains -- something that doesn't appear will happen anytime soon.

The economy, in part, has absorbed the price increases in oil and natural gas because it takes less energy now to produce one unit of gross domestic product. Put simply, in the 1970s, the economy was more energy intensive than it is now, but energy was relatively cheap back then. Today, energy costs are higher but new technologies along with tougher environmental regulations have increased efficiencies. Chemical plants, for instance, no longer flare off steam waste. They recycle it to create even more energy.

"Many forecasts, with respect to future natural gas demand, fail to take into account price sensitivity," says Billy Jack Gregg, head of the consumer division for the West Virginia Public Service Commission. "Consumers, industry in particular, will not use a commodity ad infinitum. They will employ the technologies to increase efficiency and decrease consumption. They will switch fuel sources. It will take some time to make the adjustments. If we begin to conserve, prices will fall, again."

And so the discussion turns to how policymakers should set national energy policy. High natural gas prices may hurt industrials and consumers. But, they provide the incentive to find cleaner and more sustainable energy sources -- things that would likely remain on the backburner in a low cost environment. Beyond wind and solar power, there's coal gasification and coal liquefaction -- technologies that essentially scrub all the impurities out of coal and turn it into a cleaner fuel form.

Those are all positive developments, say industrial consumers. But none of the technologies will ease the supply crunch that now exists. The expected increase in energy demand means that all fuel sources are needed, including more natural gas. Industrials are pushing bills now in Congress to increase the level of natural gas production and particularly in the Outer Continental Shelf where about 85 percent of all supplies are off limits. The availability of natural gas would therefore put downward pressure on prices and place them closer to historical levels.

Economic laws, in combination with those set by elected officials, will determine how energy is consumed. Natural gas prices may be half of what they were a year ago. But, they will shoot up once production declines and usage rises. And, collectively, the people will reconfigure how their tax dollars are spent and what their energy priorities are.

For far more extensive news on the energy/power visit:  http://www.energycentral.com .

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