Carpe Diem

US households saved billions in 2012 from falling natural gas prices, partially offsetting higher gasoline prices

gas

gasspendingThere have been a lot of news stories lately about rising gasoline prices, including this one recently from the Department of Energy, which reported that “Gasoline expenditures in 2012 for the average US household reached $2,912, or just under 4% of income before taxes. This was the highest estimated percentage of household income spent on gasoline in nearly three decades, with the exception of 2008.”

On the other hand, we don’t hear a lot of news about falling natural gas prices for residential consumers, probably because the prices we pay for natural gas aren’t as obvious and visible as the prices we pay for gasoline, which are prominently displayed at every gas station in America. But there’s a great unreported story here – US residential consumers saved billions of dollars last year from falling natural gas prices, which will at least partially offset some of the higher household spending on gasoline in 2012.

The top chart above displays the monthly CPI series for gasoline (blue line) and natural gas (red line), with both series set equal to 100 in January 2004, and shows the dramatic divergence in the two prices. While gasoline prices have roughly doubled over the last nine years (100% increase), the prices consumers paid for natural gas have fallen significantly since 2008, and were about the same last year as in 2004. Because the overall CPI has increased by about 24% since 2004, the real price of natural gas paid by consumers has fallen by 24% over the last nine years.

According to data from the Department of Energy, the US price of natural gas delivered to residential consumers in November 2012 was $9.97 per 1,000 cubic feet (most recent month available).  Adjusted for inflation, that’s the lowest residential price of natural gas for the month of November in 13 years, since 1999, which further supports the BLS data on falling real natural gas prices. Likewise, the $8.01 price per 1,000 cubic feet paid by commercial consumers in November was the lowest inflation-adjusted price for November since 1999.

The bottom chart above shows the inflation-adjusted annual spending by residential consumers on natural gas since 1999, based on data from the Department of Energy on residential consumption of natural gas and the prices paid by residential consumers of natural gas. In 2012 (based on data available through November), the estimated annual household spending on natural gas of roughly $46 billion will be 14%, and $7.4 billion less, than spending in 2011. Compared to 2008, when natural gas prices peaked at $13.89 per 1,000 cubic feet for residential consumers ($14.81 in 2012 dollars) and annual spending topped $72 billion (in 2012 dollars), US households last year saved almost $27 billion and 37% in annual gas bills. Further, US households spent less on natural gas last year to heat their homes and water than in any year since 1999, more than a decade ago.

Bottom Line: US households continue to reap huge benefits from the shale gas revolution that has lowered inflation-adjusted prices for consumers by 24% over the last nine years, according to the BLS. Based on the estimated natural gas purchased by residential consumers in 2012, American households last year saved about $17 billion in lower natural gas bills, compared to the residential gas prices that prevailed in 2008 before the shale revolution got started. Those savings will bring the cumulative total for residential gas customers to more than $50 billion in savings since 2009 (see previous estimate by the American Gas Association of $35 billion in savings for 2009, 2010 and 2011).  While higher prices at the pump and increased household expenditures on gasoline get all of the media attention, falling natural gas prices continue to bring billions of dollars in savings to American households year after year.

20 thoughts on “US households saved billions in 2012 from falling natural gas prices, partially offsetting higher gasoline prices

  1. One of the things that I would have though related to the price of natural gas is propane.

    Natural gas is usually quite a bit less expensive, in part because propane is about twice as energy dense but propane is derived from national gas.

    and I’m not see the same drop-off in propane prices as is being claimed for natural gas.

    anyone know why?

    • Propane is a liquid and has some other uses, primarily it is more of a world market as wikipedia says 10% of the fuel is imported. As a result it tends to stay nearer to the btu price on the world market.

  2. “Gasoline expenditures in 2012 for the average US household reached $2,912, or just under 4% of income before taxes. This was the highest estimated percentage of household income spent on gasoline in nearly three decades, with the exception of 2008.”

    This is at a time when gasoline use is way down. It shows that the economy is not doing well but that fuel inflation is still higher than what is being reported.

    US households continue to reap huge benefits from the shale gas revolution that has lowered inflation-adjusted prices for consumers by 24% over the last nine years, according to the BLS.

    24%? Given the fact that gas prices have fallen by such a large amount and the gas producers are now losing their shirts why is this as great as you believe?

    • There is a numerator and denominator in this equation. And since household incomes (the denominator) collapsed some $4,000 over the past 4-years, that offset a good part of the proportional benefit. If household incomes remained stable or grew by 2% per year over the past few years, then the rate of decline would have been much steeper.

      • There is a numerator and denominator in this equation. And since household incomes (the denominator) collapsed some $4,000 over the past 4-years, that offset a good part of the proportional benefit. If household incomes remained stable or grew by 2% per year over the past few years, then the rate of decline would have been much steeper.

        My points were simple and are not anything new. First, the American demand for petroleum has been in decline for some time. The 2012 consumption will be close to 5 million barrels a day, lower than the pre-2005 trends indicated. This means Mark with his constant call for a turnaround in all things economic has been wrong as the real economy continues to be very weak.

        Second, on the natural gas front we have seen a collapse in prices that has killed any chance of profitability in the shale gas sector. We now have most of the players in the industry run from gas try to reposition themselves as shale liquids players. This means that if the economy picks up in any way the increased demand will get prices up to a point where the electricity producers will switch bak to coal. I figure that the key price point is around $4.50 to $5.00 before the switch is made. That presents another problem. The increased prices will hurt consumers but will not make the shale gas industry profitable. And when demand falls again because of the switch in coal the lower demand will offset the decline in shale production and the producers will still keep losing money.

        • “I figure that the key price point is around $4.50 to $5.00 before the switch is made.” — Vag

          “Obviously gas is pretty cheap, and one of the things keeping it pretty cheap is the Marcellus,” Furniss said. “We assume that prices will rise as the market becomes more mature.” While prices today are about $3.80 per thousand cubic feet, Furniss said that Footprint Power assumes prices will not exceed $6 “at the upper end . . . in the foreseeable future.” — The Washington Post

          At that price almost every shale gas well in the country would be profitable, and that’s without factoring in falling production costs due to improvements in technology.

          Not to worry, coal producers will find hungry markets in India and China.

          • “The Abhijeet Group of India has a new $7 billion contract for steam coal from Kentucky and West Virginia … in the longer term coal’s future depends on China and India, and its prospects look bright — mainly because it is cheaper than its competitors.” — The New York Times

            While the U.S. currently sells most of its coal exports to Europe, the future is in India, China and the rest of Asia. The only thing holding up exports is … wait for it … “environmentalists”.

            Try to keep up.

          • Try to keep up.

            That’s easy. In 2012 the U.K. imported almost as much U.S. extracted coal as China.

            Should I do the Netherlands and India?

            The bulk of U.S. coal exports are to Europe. Innumeracy is rampant on the AEI threads.

          • Sadly, you are right. So many people get so hung up on details that they refuse to see the much larger picture. Of course, that is appropriate for a site like this one.

          • At that price almost every shale gas well in the country would be profitable, and that’s without factoring in falling production costs due to improvements in technology.

            Not to worry, coal producers will find hungry markets in India and China.

            I am not worried about coal producers. In fact, I am looking for candidates to purchase. But on the shale question there is no way for most wells to make money at anywhere under $7.50 gas. And keep in mind that until prices increase the producers will have to sell at a loss. While that is not a huge problem for long life assets that will continue to produce for many years shale wells lose most of their production in the first 12-24 months. That means that most of the wells that have been drilled and fracked in the past year will have almost no chance of producing a profit.

          • “That’s easy. In 2012 the U.K. imported almost as much U.S. extracted coal as China. The bulk of U.S. coal exports are to Europe.”

            “While the U.S. currently sells most of its coal exports to Europe …”

            Little problem with reading comprehension?

          • “But on the shale question there is no way for most wells to make money at anywhere under $7.50 gas.” — Vag

            “… it has to be remembered that costs of production may go down as learning curve of shale gas technology goes up. In particular, the best shale plays may produce profitably at prices in range from USD 2 to 3 per thousand cubic feet of gas, which is according to John Deutch around one-half to one-third the production cost associated with new conventional gas wells in North America. This has also been confirmed in some respectable studies by (1) Rice University’s researchers (2011) saying that “breakeven prices for some of the more prolific shales are estimated to be as low as USD 3.00, with a large majority of the resource accessible at below USD 6.00″; and (2) by IHS Global Insight (2011) which estimates that ,the full-cycle cost of shale gas produced from wells in 2011 is 40-50% less than the cost of gas from conventional wells drilled in 2011″. — Economics of Shale Gas, EnergyBiz

          • The companies have already admitted that they cannot be profitable at less than $7.50 if all of the costs are accounted for. When you cite reports that assume hyperbolic decline rates and EURs that are twice what the data is showing as probable it is easy to claim that profits are possible. But when you account for reality the hope fades away and serious change is needed.

  3. Isn’t the price of the gas for consumers served by companies like BGE legislated upon and then fixed for time periods? Do lower input prices translate to consumer savings or distributor profits?

  4. Some people look at oil prices, or gold prices, and then snivel, “The Fed is printing too much money.”

    But when natural gas prices plummet?

    • Some people look at oil prices, or gold prices, and then snivel, “The Fed is printing too much money.”

      But when natural gas prices plummet?

      Same thing. Without all of that printing the shale gas producers cannot continue to add debt to their balance sheets and run negative cash flows year after year.

  5. Gasoline prices are high, given much of the world is in depression, without beginning to close their output gaps, with above average growth:

    IMF Forecasts Modest Global Economic Growth
    January 23, 2013

    “Growth was not expected to snap back to precrisis levels in the coming years. Over all, the IMF expects global growth of 3.5 percent in 2013 and 4.1 percent in 2014, up from 3.2 percent in 2012. In the years just before the global downturn, annual economic growth was 4.5 to 5.5 percent.”

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