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Natural Gas prices & Energy Market factors affecting prices

natural gas price us

Check out how the natural gas price per therm or cubic foot is determined, and the market factors that affect natural gas prices to drive the gas rate higher or lower. Many natural gas (and electric) consumers have the power to choose a provider operating in a deregulated energy market.

What is natural gas and what affects natural gas prices?

Natural gas is a material found underground, formed over thousands of years through the compression of plant material. It is a non-renewable resource, which means natural gas rates are very heavily-affected based on available supply, delivery, and geopolitical issues. Natural gas remains a very important resource since natural gas accounted for over 44% of residential use in 2019.

What is a Therm?

Natural gas rates are normally based on the cost per British Thermal Unit (BTU), or per therm as it may be listed on the gas bill. A therm is much larger than a BTU, with one therm equaling approximately 102,700 BTUs.

Natural gas rates per cubic foot : CCFs and MCFs

Various gas bills are measured in cubic feet, or the amount of energy it takes to heat one cubic foot. Some utility companies measure the cost of natural gas by thousand cubic feet, or MCFs. 1 MCF equals 1000 cubic feet, which is equivalent to about 10 therms.

Other utility companies measure natural gas in CCFs. 1 CCF equals 100 cubic feet, approximately equivalent to 1 therm.

Just as a reference:

  • 1 cubic foot is equivalent to about 1,027 BTUs
  • 1 therm is equivalent to about 100 cubic feet = 1 CCF
  • 1,000 cubic feet = 1 MCF, or equivalent to about 10 therms

Translating from technical to practical...1 MCF, or 1,000 cubic feet is equivalent to about 10 therms, which is approximately enough natural gas to provide an average American home with space heating, water heating, cooking, and more for four days.

Though the units of measurement may be a little confusing, whether the utility or provider measures the natural gas in therms or cubic feet (MCFs and CCFs), you will not be charged more just because the unit of measurement used is larger.

How have natural gas prices changed over time in the US ?

united states energy

Since the 1990s, natural gas rates have fluctuated based on supply problems caused by weather, infrastructure, and other limitations. Longer term rates however tend to be based more on access to alternative resources.

While natural gas prices have fluctuated, the trend over the last decade in the United States is that the natural gas rate is on the decline. Specifically, in four year intervals (2012, 2016, and 2020) in February/March, natural gas prices hit new lows. This may be in part to advances in natural gas extraction and availability of renewable resources, which keep the price of natural gas low and help push gas rates to new lows.

For 2020, the average natural gas price was $2.08, with a low of $1.65 in April 2020 and a high of $3.03 in October 2020.

It's worth noting that there are substantial regional differences in natural gas prices based on infrastructure and proximity to natural gas reserves.

Energy bill breakdown: Natural gas prices per therm or cubic foot

The cost of natural gas per therm or cubic foot is based on delivery of natural gas to the home, supply of the resource itself, and taxes.

Natural gas : Delivery charge

energy bill cost details

Also known as a distribution charge, the natural gas delivery charge is based on all the costs associated with delivering natural gas to the consumer. Delivering natural gas, as well as purchasing and maintaining pipelines (and other transmission infrastructure) are incorporated into the final delivery price. Depending on the utility, this cost may be a fixed price per MCF (or 1,000 cubic feet).

Unlike electricity which is normally generated relatively near consumers, natural gas is extracted from sometimes distant locations.

The cost to deliver natural gas to the home depends on a number of factors, that include:

  • Pipeline capacity and infrastructure
  • Storage facilities and vicinity to end-consumers
  • Equipment and technical issues

Natural gas : Supply charge

These natural gas costs reflect the market price of natural gas multiplied by the amount used by the consumer. These charges also include costs associated with customer service offered by the provider.

Taxes on natural gas

Natural gas taxes are rolled into each monthly bill and are the same across all utility companies. These are often charged based on the number of therms consumed, and they include local, city and state taxes.

The natural gas sales tax

The sales tax on natural gas is a tax paid directly to the state. It applies not only to natural gas, but to the sales of any goods and services.

Energy efficiency charges for natural gas

Most states have energy efficiency programs for electricity and natural gas. In order to pay for these programs, natural gas customers are charged an extra percentage of their gas bill. The charge paid in the gas bill goes to funding energy efficiency. For example, customers willing to renovate their homes and improve heating efficiency can receive money to help with this expense.

Energy efficiency programs also fund research and development for renewable energy and energy efficiency.

Revenue-based natural gas charges

Utility companies and energy providers are, themselves, taxed on the sales of electricity and natural gas to customers. Many local municipalities impose taxes on the utility company's revenue. In order for the utility company to pay the local (municipal) tax, they pass the cost on to customers. These costs are recovered through a tariff surcharge and may vary depending on the municipality.

"Other" state surcharges for natural gas

The "other" surcharges can include charges that promote education and outreach, energy assistance for people with low-income, with medical problems, or assistance for elderly people, just like for electricity.

Natural gas bill : Miscellaneous charges

Natural gas bills may also include miscellaneous" charges, that include:

  • Storage service charge
  • Environmental regulations cost recovery
  • Cost adjustment for estimated bills

When a utility estimates natural gas consumption, customers may receive charges or deductions on their bill based on differences in consumption. Strategies for estimation include:

  • Using consumption records for the same month in the prior year
  • Meter readings every other month with an estimation in between

The typical natural gas bill : natural gas rate types

Utility companies may charge fixed and non-fixed (variable) costs, within the delivery and supply sections of the customer bill. Each state splits up and regulates monthly fixed costs differently. The variable costs on an energy bill change based on the amount of natural gas consumed each month.

For customers using natural gas to heat their home, 70% of the the average bill goes toward supply charges.

Variable natural gas prices

Often, American utilities put consumers on a default variable natural gas price per therm. This means that the rates of natural gas consumed changes based on market costs. Costs associated with delivery and supply may change as well, but normally these changes must be approved by the state government if using the local utility.

The natural gas bill will often show the rates of natural gas per therm or cubic foot averaged over the monthly period. Time of Use plans also vary during the day based on times of high and low demand, where high demand times have a much higher rate per therm or cubic foot.

Fixed natural gas prices

Fixed rates are less common, and normally involve a contract between the provider and the customer. The fixed rate locks in a natural gas price per therm for the entire period of the contract, with the fixed rate usually being based on the then-current natural gas market price. This protects consumers from fluctuations in rates, and offers the chance to keep a good price at the start of the contract.

Alternative versus Local utility natural gas providers

In deregulated states, the natural gas prices vary when the time comes to choose a traditional local utility, or participate in a natural gas "power to choose" market. Historically, before energy market deregulation, Americans could not choose electricity or natural gas providers.

In the past, each community had only one "option" - so the provider was essentially decided based on location alone. Now, with deregulation, many Americans can choose their own alternative energy provider, the usage plan that fits best to the household, and potentially save some cash. In many states, the local utility has rates that are regulated by the state government, while an alternative provider is not regulated and is open to competition.

Alternative providers: How do they work?

natural gas provider contract residential

If you choose to switch to an alternative natural-gas provider, the local utility will still take care of delivery, or the service and costs associated with getting natural gas from the source/storage to households. A new alternative natural-gas provider will issue all costs and services related to consumption, including customer service and the cost of natural gas used.

Going with an alternative provider is where customers can save on natural gas bills. Normally, after the switch, customers will receive two natural gas bills - one for delivery charges from the local utility company, and the other for supply charges from the new alternative provider.

Market factors that affect natural gas prices

More complicated than electricity, natural gas prices for consumers consist of several variables.

A natural gas price is first based on the cost of the average wellhead rates, which is the rates of crude natural gas in its initial form.

The crude natural gas must then be processed (before household consumption). Processing crude natural gas involves removing certain gases from its crude composition. Termed as gas production, this process adds associated costs that affect the final natural gas price.

Natural gas is also traded on the New York Mercantile Exchange (NYMEX) Henry Hub commodity market in spot and future contracts before being sold to consumers. Transactions here affect the rates paid for natural gas in all of North America.

Finally, the residential cost of natural gas per therm or cubic foot in the United States is based on factors related to consumer demand and weather, as well as supply availability and delivery services costs.

Natural gas demand : Weather and import/export

Apart from natural gas sourcing, extraction, processing, supplying, and delivering - energy demand is a huge factor in the final natural gas price. How is demand affected and determined?

Weather and natural gas

Seasonal weather patterns affect residential natural gas rates, but not in the way one would expect. Because there are high fixed costs to produce, natural gas prices are actually lower in the winter when demand is highest. In the summer, when demand is much lower, the fixed costs of producing natural gas are spread over many fewer therms, so the cost per unit is actually higher when demand is the lowest.

Weather has a large impact on the rates of natural gas in other ways. Major weather events can affect extraction, for example, as offshore drilling platforms shut down during extreme weather. This reduces available supply and increases rates.

Imports and Exports of natural gas

According to the U.S. Energy Information Administration, the United States has substantially increased the exportation of natural gas over the last 5 years. In 2019, about 61% of all U.S. natural gas exports went to Mexico while 34% went to Canada.

Higher export rates tend to reduce local supply in the US (esp without importation of natural gas), which can cause natural gas prices to increase. In addition, higher import rates help to reduce natural gas prices. The largest U.S. import source is Canada (98% in 2019 - EIA.gov).

Reductions inĀ natural gas prices for residents

Because it is a limited, non-renewable resource, natural gas prices will inevitably increase as scarcity and depletion approach. However, shifts to new extraction methods and different fuel sources have, for now, actually lowered natural gas prices per therm or cubic foot paid by consumers.

Natural gas : New technology

Improvements in extraction technology have increased the amount of gas that can be taken from a single deposit, leading to lower natural gas prices. Advancements include methods like hydraulic fracturing, or fracking, which has greatly reduced the market spot rates of natural gas since 2008. This in turn affects natural gas prices pushed on to consumers.

Natural gas : Shale gas

As the supply and production of natural gas become more limited and affected by demand, there has been a shift in North America toward shale gas. Shale, a formation of fine-grained sedimentary rocks, was found to be a location where natural gas is commonly trapped. Consumers who live in counties above shale gas deposits pay on average 30% less for their natural gas.

Energy alternatives to natural gas

The gradual shift toward renewable and green energy alternatives to natural gas has a positive impact on the cost of natural gas, as it spreads out demand to other energy sources. As new energy alternatives has taken off in the United States, this perhaps explain the big impact on residential gas rates per therm. It could however be important in the future.

Improved storage of natural gas

Natural gas storage helps to keep natural gas prices per therm down since it allows providers to store extra gas to use later during times of higher demand, cutting down on infrastructural stress and supply limitations. Storage is usually done underground in unused fields. Communities with nearby storage capabilities may save more on their natural gas than those without.

Moving to Texas or already there? A majority of Texas residents live in deregulated electric zones where the competition between +70 electric providers enables the power to choose from electricity plans that offer 100% renewable energy, rate type options, or even annual freezes on summer rates!

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