MIT Report Ignores Volatility in Natural Gas Prices

By Dr. Frank Clemente

In June, a group of Massachusetts Institute of Technology (MIT) researchers released a report on “The Future of Natural Gas.”(1) The basic thrust of the report is that the production of large amounts of shale gas at very modest prices will allow for the significant expansion of natural gas consumption — especially for power generation in the United States.

Unfortunately, the natural gas industry provided the money to write the report. While this alone doesn’t invalidate the work, it certainly suggests that any flaws might be those of omission rather than commission. Put another way, the MIT group presented a risk-benefit analysis of natural gas… but left the risk section to someone else. Last week we showed how the MIT report gave surprisingly short shrift to the increasingly apparent environmental impacts of shale gas production. In this week’s edition we examine yet another key omission in their report — natural gas price volatility and how it impacts families and businesses.

Volatility: It’s a Matter of Perspective

The Roller Coaster Ride of Industrial Gas Prices in Illinois over the Past Decade(4)


“The results for electricity from natural gas strengthened this conclusion: given the low and high prices of natural gas in recent years, [gas] can be one of the lowest cost – or one of the highest cost – sources of electricity.”
—National Research Council, 2009(5)

Families Bear the Brunt of Fluctuating Gas Prices

Natural gas price volatility over the past decade has severely impacted families. Not only have many lost jobs, but at the same time their energy bills have increased. Increased gas-based generation does not merely raise the cost of electricity; it also raises the price of gas for other consumers. During the past decade gas prices have not only averaged four times higher than coal prices but were far more volatile. In 2000, for example, residential gas prices started at $6.37/mcf but escalated to $13.74 in 2004. They then jumped to $20.24 in 2008 but dropped to $10.48 by the beginning of 2010. Upwards of 60 percent of the homes in the United States are heated with natural gas. Many of these homes are concentrated in the Midwest and Mid-Atlantic States. During the winter their dependence upon natural gas is virtually total since most lack alternative sources of heating. Thus, their need for natural gas dramatically increases as temperatures plummet.

States Especially Vulnerable to Swings in Natural Gas Prices

Planning a family budget under such variability becomes nearly impossible at the lower income levels. The Low Income Home Energy Assistance Program (LIHEAP) and similar governmental agencies are chronically overwhelmed with requests for support for utility bills when home heating costs surge. Millions of families cannot sustain the escalating electric rates and home heating costs caused by high and volatile natural gas prices: 21% of LIHEAP recipients are families with children under five; 37% are elderly; and 50% are disabled.(6)

Should We Go Further Down This Costly Road?

Over 90 percent of the new power plants built since 2000 depend on natural gas. Almost 50,000 additional megawatts of gas capacity will be added by 2013. The consequences of this rush to build out the natural gas infrastructure have been expensive indeed. Despite the adverse socioeconomic impacts of this increased dependence on natural gas for power generation, the MIT group recommends we go even further down this expensive and risky road. They conclude “Coal generation displacement with NGCC generation should be pursued as a near-term option…” but virtually ignore the potential adverse societal, economic and environmental impacts of increasing our dependence on gas even further.

It’s Not Different This Time

“. . . the degree of impact expanding unconventional domestic natural gas reserves (will) have on long-term gas prices and volatility is less than certain . . . The future of the market appears likely to include continuing periods of volatility and uncertainty. ” — California Energy Commission, 2009(7)

References:

(1) MIT. The Future of Natural Gas, June, 2010
(2) Houston Chronicle (chron.com-2/12/2009).
(3) http://energy.senate.gov/public/index.cfm?FuseAction=Hearings.Witnesses.
(4) Energy data based on files from EIA at http://www.eia.doe.gov/
(5) America’s Energy Future NAS/NRC, 2009
(6) http://www.liheap.org/databook02/
(7) California Energy Commission, 2009

Energy Weekly here.

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