Gas prices skyrocket globally, causing widespread strain on businesses and industries
Gas prices have been on a steep climb worldwide, causing quite a headache for businesses and industries that rely on the commodity for heating, electricity generation, and as a raw material.
In the past year, natural gas prices have shot up by more than 180%, hitting an all-time high of $5.90 per million British thermal units. The United States, the world's leading gas producer, has been struggling with increased fuel costs just as the country grapples with inflation for the first time in over a decade.
The rising gas prices are putting a squeeze on consumers, who have already been battered by surging prices for used cars, gasoline, and meat. Inflation has forced the Federal Reserve to reconsider its ongoing support of the economy, prompting some moderate politicians to question the ambitious budget plans of the White House.
Globally, the crisis has left investors nervous about economic growth and high oil prices.
"It's bad enough under normal circumstances. But now there's widespread concern over inflation," said Robert McNally, president of Rapidan Energy Group.
Nearly half of U.S. households use natural gas for heating and hot water, according to the U.S. Energy Information Administration. However, many customers do not pay the daily gas prices that we see in the headlines, according to the American Gas Association.
Instead, the organization notes that its members buy gas through long-term contracts that fixed the prices and protect customers from certain price fluctuations, and also store winter gas reserves by purchasing it months in advance.
Europe, meanwhile, is facing a more severe crisis. The continent is grappling with skyrocketing gas prices and gas shortages, leading to power outages and factory shutdowns. The situation is so dire that McNally called it "catastrophic."
The crisis has forced a large American fertilizer manufacturer to stop its operations in the UK due to concerns about insufficient CO2 production that could lead to food shortages. The British government stepped in to save the company, fearing the impact on the food supply chain.
Insatiable demand and supply constraints
The skyrocketing gas prices can be attributed to several factors, one of which is the insatiable demand for natural gas. Despite the economy recovering, natural gas production has not kept pace. This means that supply is struggling to catch up with the surge in demand, pushing prices higher.
According to the U.S. Energy Information Administration, storage levels in the Lower 48 states are currently below the normal average, and the situation has been exacerbated by several heatwaves across the country this summer, which boosted air conditioning and electricity demand.
Heatwaves also reduced renewable energy output, further increasing the reliance on natural gas. Considering that natural gas is the primary source of U.S. electricity and accounts for 40% of total power generation, the situation is alarming.
Hurricane Ida, which caused significant damage to oil and gas production in the Gulf of Mexico, also played a role in the supply shortage. Additionally, unforeseen production disruptions in Norway and Russia have further exacerbated the situation.
The speculation factor: Wall Street creates a perfect storm
As international prices spiked, demand for natural gas abroad surged, and U.S. production decreases continued. The Energy Information Administration anticipates that U.S. liquified natural gas (LNG) exports will average 9.6 billion cubic feet per day this year, up 48% from the same period last year.
Wall Street, in the meantime, noticed the low storage levels and saw an opportunity for profit. Hedge funds and other large traders took advantage of the situation by buying contracts, driving up gas prices even more.
"It's a perfect storm, and there are specification trades that profit from it. It's the Spec-Nirvana," said Jonathan Ferro, a Bloomberg commodity strategist.
For some investors, the surging gas prices could be an overreaction, and analysts at Bank of America predict that prices will fall in the last three months of the year and continue to decrease over the next year.
The challenges ahead
The rising gas prices present a significant challenge for governments worldwide, who already have their hands full dealing with inflation and their desire to transition away from fossil fuels.
Environmental groups are pushing for a ban on fracking to reduce emissions and prevent global warming. At least four countries in the EU have plans to phase out domestic production of fossil fuels by 2050.
U.S. President Joe Biden has set a target of achieving a carbon-free electricity sector by 2035, a goal that would require a shift from natural gas and coal to renewable energy sources like solar and wind.
The high energy prices serve as a painful reminder of how much the global economy is still dependent on fossil fuels and how challenging – and perhaps unpopular – it will be to transition away from them.
