Gas is a natural resource that has been around for millions and millions of years. While there are several different types of gas, natural gas is typically used for heating and cooking. Found underground between pockets of thick, hard rock, it wasn?t until recently that energy companies could efficiently dig for gas.
Generally, when a gas well is found, energy companies will first break through the rock surrounding it to release the gas, and then line the hole with special products to keep the gas contained. Electric charges are then sent down the well, followed by a pressurized fracking solution. Both have an affect on the surrounding rocks and because the solution is heavier than the gas, it rises to the top of the well.
One might think that such a complex process would cost energy companies too much. However, the opposite is true. Fracking technologies make it cheaper and faster to bring gas to the surface than many other natural resources.
Despite America?s growing fondness for natural gas, coal remains the dominant source of energy consumption. This fact raises some important questions about the energy market:
If natural gas isn?t the leading source of energy, why do lower gas prices have such an impact on electricity rates?
Increased Production & Inventory
In 2014, the International Energy Agency estimated that fifty percent of America?s shale gas output is a result of oil production. This was due to changing extraction technologies that allowed energy companies to drill simultaneously for oil and gas. The result was a drastic increase in natural gas production.
Since then, rigs have turned to oil-rich shales, where gas is extracted as a result of digging for oil. Other rigs have also moved on to massive gas shales like Marcellus, where oil is also present.
When the price of energy dropped by forty-one percent in the later half of 2015, the downturn was a direct result of the global increase in production and record-high inventory levels. Since the production of oil is tied to gas, when rigs located in oil-rich shales stop or reduce drilling, gas follows suit.
The Low Cost of Gas and Electricity Rates
In general, the price of gas is affected by supply and demand. Over times, this delicate balance can see changes (as described above), which result in big pricing adjustments to keep the market stable.
Major supply factors that can have an affect on cost include, changes in natural gas production, amount of natural gas exported/imported and storage levels. If there is an overflow of supply, the cost tends to lower. If supply is scare, the cost tends to get higher.
Major demand factors that can have an affect on cost include, growth of economy, weather and cost of competing fuels. Quite often, when the demand is high, the cost is high, and when the demand is low, the cost is low.
Benefits and Drawbacks
When natural gas prices are low, they bring down the production cost of electricity. While other sources of energy might not be at the same rates, from a wholesale perspective they tend to follow suit in order to remain competitive.
The drop in market price affects many people like, customers, utilities and power producers. While it gives some a distinct advantage, others definitely feel the economic pinch.
Customers who use gas to heat or cook their homes and businesses, benefit significantly. They can often renegotiate or switch suppliers to take advantage of better rates. Customers who use other types electricity also benefit as electricity prices are linked to lower production costs. Lower income family or groups are the types of customers that lower prices help the most.
For unregulated power producers or diversified utilities, the impact is a negative one. Wholesale energy rates are linked to natural gas rates. In other words, falling rates cause wholesale rates to fall further! As a result, it?s not possible for these companies to generate as much profit.
Regulated utility companies, however, benefit from lower rates. The state government determines their profits based on a cost-of-service model. This means that they have the power to offer customers lower prices without experiencing the same loss in profit. It also means more business, as customers are likely to switch to gas heat.
It?s important to note that while most states and cities will see lower gas costs, there are some regions that won?t see a difference in their energy bills – even if they switch to gas.