Natural gas price lull fuels lock-in dilemma

January 13, 2002|By Jay Hancock

YOU CAN thank the recession for this: The price of natural gas in Maryland is 35 percent less than it was a year ago.

Idled factories and underworked electricity plants have caused a slump in demand that is preventing a repeat of last winter's natural-gas sticker shock. Warm weather helped, too.

But now you have a decision to make. Should you seize on the dip to lock in your gas price for the next year or two? Or should you float with the fluctuating market and hope prices stay low or even drift lower?

More than pennies is at stake. The difference between last year's high rates and the current fixed-price deals offered by some local vendors is significant.

Let's assume that next winter natural gas prices spike back up to where they were a year ago. By taking the best available one-year lock-in, the average Baltimore-area household could save $168 during the next November-March cold season, I figure.

Of course, if gas prices drop further, or even stay put, you lose.

The fixed rates offered by local vendors are still far north of the prevailing prices before last year's crisis. And they are even above the rates likely to prevail into the spring and summer, since the gas vendors are effectively charging you a premium for insurance against future price pops.

Unfortunately, smart, informed people disagree on what will happen.

One set of seers believes that the present relief in natural gas costs is only temporary and that dwindling U.S. production and a reviving economy will soon set prices on the boil again.

"Sometime between the second half of 2002 and the first half of 2003, the shortage in natural gas supplies will become much more evident," says Christopher Ellinghaus, an energy analyst at Williams Capital Corp. in New York. "Natural gas prices are more likely to rise than fall by a pretty good margin."

Despite the current slump, all signs point to a growing demand and shrinking supply for gas, Ellinghaus says.

For environmental and economic reasons, natural gas has become the fuel of choice for electricity plants, taking over megawatts that were once driven by coal, oil and nuclear power. Clean, quiet gas heat is also the choice of increasing numbers of households.

At the same time, growth in the U.S. production of natural gas has been on the same track as that of crude oil: thin and thinner.

But whereas shrinking U.S. oil reserves can be cheaply replaced by Saudi Arabia and other far-flung producers, scarcer natural gas supplies cannot. Gas requires expensive liquefaction to stuff it into oceangoing tankers, or it needs even more expensive long-distance pipelines.

Ellinghaus believes U.S. gas production could fall slightly this year, but the Energy Department forecasts gas use will grow by 7.5 percent in 2002. If the economy heats up again, which many analysts expect, a supply pinch could drive up prices high and soon.

Given the chance to lock in at current rates for next winter's natural gas bills - an option available to Baltimore households thanks to deregulation and gas-vendor choice - "I'd take that in a heartbeat," Ellinghaus says.

Slow down, says Bruce B. Henning, who follows the natural gas market for Energy and Environmental Analysis Inc. in Arlington, Va. Last winter's price pain for gas consumers resulted from a double-punch that is unlikely to be repeated soon, he believes.

First, extraordinarily low petroleum prices in the late 1990s caused a decline in gas production and very low storage reserves. Then a booming economy blotted up the supply that was left, creating the shortage.

But last year's high prices lured prospectors back to the gas fields, and the number of working rigs and volume of stored gas have both risen, Henning says, and that is easing the scarcity. He believes Wall Street analysts such as Ellinghaus have underestimated U.S. capacity to feed the growing demand for natural gas, especially among small drillers.

"Our view at this point is that prices are going to stay low through this year and not start to trend back up until after 2003" - and even then not to 2001 levels, Henning says.

He is unimpressed with the lock-in rates being offered Baltimore-area consumers.

The best fixed deal I could find was an offer from Washington Gas Energy Services to sell residential gas at 49 cents per therm over the next year, starting in March. The delivery charge by Baltimore Gas & Electric is extra.(A therm is a unit of energy. Maryland regulators figure the average gas-heated house in the Baltimore-Washington corridor burns about 140 therms per month in the winter.)

To put this in perspective, Maryland natural gas prices hit 97 cents a therm early last year. In the winter of 2000, before the shortage, the local winter cost was only around 38 cents. For BGE customers who haven't locked in, this month's spot price is 52 cents.

Washington Gas' fixed-rate deal of 49 cents might look good next to the spot rate of 52 cents, but by agreeing to pay 49 cents over a year you would fail to benefit from the drop that always occurs when the weather warms up.

Almost any month is usually cheaper for natural gas than January or February. In December the BGE rate was 45 cents per therm. It was 38 cents in November and 31 cents in October.

You can shop around for natural gas by calling vendors listed on BGE's Web site, The site has other good information, too, such as historical prices. Deals frequently change, and they may improve if market prices continue to drop.

I believe prospects for another natural-gas shortage are higher than for an oil or gasoline drought. But I have confidence in the market's ability to find new energy supplies that the experts had written off.

This doesn't seem like the time to sign a fixed-price gas contract.

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