Get Used to High Natural Gas Prices

July 25, 2003

COLUMBUS, Ohio — Just like the realization that Americans may never again see 99-cent gasoline at the pumps, farmers should be prepared to accept the possibility of higher than normal natural gas prices over the next several years. Matt Roberts, an Ohio State University agricultural economist, said that long-term production problems in the industry are keeping natural gas prices elevated this year and raising concerns across the country. “When you start having these high prices in the spring that don’t come down like we would expect them to, people do begin to become worried,” said Roberts, an assistant professor with the Department of Agricultural, Environmental, and Development Economics. “What is happening is not because of short-term problems but because of long-term structural problems. It’s one of the reasons (Alan) Greenspan has discussed this with Congress and one of the reasons (President) Bush has talked about it.” The structural problems Roberts is referring to are the continued depletion of natural gas reserves in the United States, inaccessibility of new sources due to location or federal laws, and higher production prices at current drilling locations — driving up the cost for end users. “Natural gas is a fossil fuel; it is not a renewable resource, and America’s easily accessible gas reserves are being rapidly depleted. Many of the areas in America where we pull gas out of, like the Gulf of Mexico and the California coast, are becoming depleted,” said Roberts. “The problem is that most of our remaining natural gas reserves are either in deep water, which is much harder to explore, and therefore, produce more expensive gas, or are located in areas that are currently off-limits to exploration, such as the eastern Gulf of Mexico, some areas off the California coast, the mid-Atlantic coast, parts of Alaska and many federal lands in the western U.S.” Roberts stated that access to low-cost reserves or the construction of transportation — for example, a natural gas pipeline from Alaska to the U.S. mainland — is required to solve some of the problems the natural gas industry is facing. “Neither of these solutions, however, will happen overnight. There is political opposition to drilling in new areas and the construction of a pipeline would take 10 to15 years,” said Roberts. “Even if tomorrow Congress allowed unrestricted drilling throughout the U.S., it takes time to get those new wells on line. We would still be looking at two to three years of seasonally increased volatility in the natural gas market.” So it seems the best way for farmers to deal with the issue is to just accept it and prepare themselves for potentially high fertilizer prices in the future. “I would start paying more attention to the natural gas market. Farmers should start to think about natural gas as an actual business risk to their enterprise and start to think what they need to do to manage that risk in the same way they manage the price risk for production,” said Roberts. “I think the reality for most farmers is that higher natural gas prices means increased forward contracting with fertilizer dealers and accepting that the cost of production of fertilizer-intensive crops has increased.” Natural gas prices are currently running just over $5 per million btu, a drop from $6.50 or $7 spring prices. Roberts said the drop is due to the relatively cool summer much of the nation is experiencing. “Natural gas prices tend to go up in response to hot summers and cold winters. And one thing we’ve seen so far this summer are relatively mild temperatures,” said Roberts. “If it remains a cool summer we could go back to a point where we are talking about relatively normal natural gas prices. If the remainder of the summer becomes exceptionally hot, inventory will stop building and we may go into a decline.” Though the weather may have a factor on short-term price fluctuations, in the long run, natural gas prices are expected to remain higher than normal. “We may be looking at about $4.75 to $5.25 as that being the normal equilibrium price,” said Roberts. “What that means is more worries for farmers about natural gas prices come this fall and next spring, and the fertilizer price spikes that will go along with that.”

Author(s): 
Candace Pollock
Source(s): 
Matt Roberts