Natural Gas Prices Heat Up
Higher Costs Endanger Economic Growth, U.S. Manufacturing

By Justin Blum
Washington Post Staff Writer
Friday, October 7, 2005; D01

Soaring natural gas prices threaten to propel winter heating bills sharply higher, slow economic growth and push manufacturers overseas.

U.S. consumers could face bills averaging 48 percent higher this season than last year, according to predictions by the economic research firm Global Insight Inc. The escalating costs could cause Americans to cut back on dinners out, trips to the mall and spending, crimping U.S. economic growth. Businesses, squeezed by high energy costs, could limit expansion plans. The high prices also are pumping up inflation.

Manufacturers that use huge amounts of natural gas are scouring the world for cheaper prices and considering moving operations to ease their costs. A renewed exodus -- many companies have already shifted overseas -- could further knock back growth in the United States and boost unemployment.

Andrew N. Liveris, chief executive of Dow Chemical Co., told a hearing yesterday before the Senate Energy and Natural Resources Committee that the country is in a "natural gas crisis." The Midland, Mich., company, which uses large amounts of the fuel to produce chemicals, must consider locating new plants in other parts of the world, such as China and the Middle East, because of U.S. energy costs, he said.

"How can I recommend investing here?" Liveris said.

U.S. natural gas prices are among the highest in the world. Though the United States imports some natural gas, most is produced domestically. But supplies have failed to keep pace with demand.

Power plants have increasingly turned to natural gas for fuel over the past decade because it is cleaner-burning than coal. About 17 percent of the country's electricity is generated by natural gas, according to government data. Natural gas accounts for about 63 percent of energy consumed in U.S. households. The fuel heats 55 percent of the country's homes.

U.S. natural gas prices have been edging higher for years and shot up sharply in recent weeks because of hurricanes Rita and Katrina, which damaged production in the Gulf of Mexico along with onshore processing facilities.

Imports are not able to make up for the lost supplies -- as they have for oil and gasoline -- because not enough liquefied natural gas is available. Too few ships and terminals exist to handle a significant increase in imports. Domestic production, which has been flat in recent years, cannot be quickly increased without significantly more drilling, analysts said.

"There is justification for concern about natural gas prices at these levels," said Jason Schenker, an economist with Wachovia Corp. in Charlotte. "Prices now are essentially twice what they were last winter. That's likely to squeeze consumers."

The cost to heat homes with natural gas could increase about $500 this winter compared with last year, according to Global Insight in Lexington, Mass.

In the D.C. area, officials with Washington Gas forecast that consumer bills could jump as much as 32 percent compared with a year ago. The company said it put large amounts of natural gas in storage over the summer, when prices were slightly lower, which will help hold down prices a bit. Costs could increase if the winter is unusually cold and demand increases, company officials said.

The price of natural gas for November delivery closed at $13.38 per million British thermal units (Btu) yesterday on the New York Mercantile Exchange. That was up 90 percent from a year ago. Analysts expect prices to fall somewhat after hurricane-related repairs are completed in the Gulf.

Prices in the largest producing countries -- such as Algeria, Qatar and Nigeria -- are sharply lower than those in the United States -- below $1 per million Btu, analysts said. In some European countries, natural gas sells for about half the U.S. price.

Unlike crude oil, whose price is set on a world market, natural gas prices are set in local markets. In countries where supplies are abundant, prices tend to be lower.

Rising prices are generating concern on Capitol Hill and are increasing pressure on lawmakers to open drilling areas that are now off limits. A measure approved by the House Resources Committee last week would allow drilling for natural gas offshore on the Outer Continental Shelf.

Lawmakers who support the measure said momentum is building after years of failed attempts. "I have a lot of members saying . . . 'I'm seriously thinking of switching to your side,' " said Rep. John E. Peterson (R-Pa.)

The Washington-based National Association of Manufacturers and the Arlington-based American Chemistry Council, which represents the chemical industry, have been pushing for more domestic production. Businesses small and large have been making their case to members of Congress that something needs to be done about natural gas prices.

Peterson, whose district includes manufacturers of brick and asphalt, said, "There's just no way that business can absorb this."

Environmentalists are seizing on higher prices as evidence of a need for conservation. They are calling for more strict requirements for appliances that use natural gas and for housing insulation. They also want tax breaks to encourage consumers to buy more efficient appliances.

"We just don't have enough natural gas out there to meet our long-term needs," said Karen Wayland, the Washington-based legislative director of the Natural Resources Defense Council, an environmental group. "The only answer, especially in the short term, is energy efficiency."

Chemical industry officials are warning that more plants will shut operation in the United States and relocate.

"They're saying, 'Okay, we have a budget of a billion dollars we're going to invest in production. Where's the best place to do it?' " said Owen Kean, senior policy advisor for the chemistry council. "Increasingly they're making the decisions to do it someplace else."

The United States has five terminals where liquefied natural gas can be imported, and a number of additional facilities have been proposed or approved. A number of major projects around the world are underway that will produce liquefied natural gas. Analysts said that in the future, the country will become more reliant on imports, which could eventually help to moderate prices.

But in the meantime, companies that import liquefied natural gas have been struggling to obtain more. Most of the supply is locked up in long-term contracts, and companies that sometimes have extra have been suffering production problems.

"That's kind of dried up what would normally be excess production available for spot delivery," said Jane Michalek, a vice president with Suez LNG of North America. "There's not a lot of excess production out there right now."