Electricity to air-condition our homes has been expensive this summer. Unfortunately, it looks like it is not going to let up. Even turning up the heat this winter will cost more. It’s all being driven by the increase in the price of natural gas. In the U.S., we use it to generate approximately 40% of our electricity.
By now everyone knows that Russia’s disruption to the energy markets is the cause… Sure Russia’s own decision to shut off flow to Europe and the West’s sanctions/boycotts are screwing things up, but that gas is still getting to the global marketplace. So why are prices still high?
Russia has a massive geographic footprint and produces an outsized proportion (in relation to its population) of the world’s natural gas, so there seems to be less natural gas in the world lately. Is that true though?
The Reasons Why Natural Gas (And Electricity) is High
Russia’s invasion and continuing war with Ukraine has shifted the flow of supply to it’s dwindling number of “friendly” countries. Consequently, Russia is receive less money for its product while the countries are getting it cheaper for the the bulk natural gas. These “Russia-friendly” countries receiving the natural gas do not match the consumption of the west AND they know Russia is in a bind, so the marketplace is out of balance and fewer hands are on the commodity. So a new cartel of sorts is in charge of natural gas instead of just OPEC, and it seems that they are going to make the most money while they can. Plus the cost of moving it around the world will increase, so that’s why prices are are from an market perspetive.
Social / Cultural Impact on Electricity Prices
Another big reason why energy and electricity prices stay high is because our consumption has not dropped.
1) We’re facing higher temps and powerful weather. Given how hot this summer was for parts of the U.S., many had their air conditioners working overtime… this increases demand and there are more volatile spikes in demand
2) Lack of solidarity for Ukraine/Europe… we’re not decreasing our demand
3) There is a continued ambivalence to over-consumption… our demand is perpetually increasing (we waste energy and electricity producing food that goes to waste, creature comforts like cold restaurants set to 68F in Houston during the summer forcing many to bring wraps or jackets inside when it is 105F outside.
What’s Ahead for Electric Rates?
Forecasters predict these elevated gas prices to stay high through the rest of 2022 and through winter 2023. Russia has supplied Europe with cheap natural gas to power commercial and residential heat or electricity, so they know that they can continue to use its energy resources as a weapon and bargaining tool with the world.
In the U.S., half of homes use natural gas for heating or cooling. U.S. natural gas inventories have also dropped this year, which together has driven up prices around 300% from just a few years ago. What will this mean for energy and electricity prices in the U.S.?
Electricity Prices Will Keep Climbing
Even though our inventory LNG (liquid natural gas) is low, this hasn’t stopped the U.S. from exporting large amounts to Europe to help fill the void left by Russia. U.S. natural gas producers have an incentive to export since they stand to profit from the spike in global prices. It is as simple as that.
A simple reduction in demand/consumption/use would address that, but its diffusion of responsibility. Individuals don’t want to take ownership of the impact of their own choices to consume. If the price they can get in Europe is a lot more than what they can sell their natural gas for in the U.S., then some of that is going to be exported to Europe, and that is going to raise the price of things in the United States. It won’t be to the price levels seen in Europe, but we will likely continue to see more expensive energy costs in the U.S.
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How much will electricity bills go up?
Bills could go up a lot, especially in a state like Texas, which is the largest natural gas-consuming state. Forecasters estimate the average family will pay more than $1,200 to heat homes this winter, which is $175 more than last winter. That’s a 17% increase! And for the 40% of U.S. homes that use natural gas to heat/cool their homes, they could see up to a 33% increase.
What makes it even more impactful is that nearly 40% of families are already feeling financially strapped according to recent polls and reports.
How will high natural gas and electricity prices last?
Given the trends in weather patterns, the northern hemisphere could be spared the spike in natural gas prices is the winter is mild… again.
Even so, it really depends on Russia and Putin’s choices. Kremlin spokesman Dmitry Peskov said this month that Russia will resume gas flows only if the West lifts sanctions.
The other big factor is how quickly Europe can find alternative natural gas sources. Europe gets most of its gas through pipelines, but the EU is working build new infrastructure to receive liquefied natural gas, which can be transported by sea from other producers like Qatar & U.S.
That takes time, so price relief is not expected any time soon.