Thursday, December 5, 2013

Reality Check: Why Did Gas Wellhead Price Fall 66% But Residential Price Drop Just 23% From 2008 To 2013?

The charts below show the huge variations in average natural gas prices that different consumers pay. The average price a residential customer paid for natural gas in 2012 was $10.68, while the average price of gas at the well was $2.66.  What explains such a massive difference between those prices?

First and most importantly, most of the $10.68 paid by a residential customer is for the pipes, the meters, and other items needed to move the gas from the well to the home.

Second, nearly all residential customers are not paying the spot or short-term gas price but are paying for a portfolio of gas that includes some spot gas but also long-term gas contracts. The price of the gas in the long-term contracts was higher than the low, low 2012 spot gas prices.

Yet, very large consumers of gas--industrial and electric power plant users--pay much, much lower natural gas prices than residential customers. This much lower pricing reflects a number of market and regulatory factors, including how utility commissions assign fixed costs to different kinds of customers.

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