Tuesday, May 01, 2012

For Every $1 Drop in Natural Gas Prices, Residential and Business Consumers Save $23 Billion Annually

Average natural gas price by user and total spending, 2008 vs. 2011
UserAvg. Price 2008  Spending 2008  (B)Avg. Price 2011Spending 2011 (B)Savings 2011 vs. 2008 (B)
Residential$13.89$67.95$11.39$51.12$16.83
Commercial$12.23$38.56$9.47$28.02$10.54
Industrial$9.65$64.37$5.49$33.98$30.38
Electric Power$9.65$64.35$5.49$38.16$26.19

Total, 2008$235.23BTotal, 2011 $151.29B$83.94B
Note: Prices are per 1,000 cubic feet. 

Question: How have falling natural gas prices translated into savings for residential, commercial and industrial consumers? 

Using data on natural gas consumption and prices from the EIA for the years 2008 and 2011, the table above shows in 2008 annual total spending on natural gas was about $235 billion for residential, commercial, industrial and  electric power customers, and by 2011, as a result of falling natural gas prices thanks to shale gas, total spending on natural gas had fallen to roughly $151 billion.  Falling gas prices resulted in savings of about $84 billion in 2011 compared to an alternative scenario where gas prices had remained at 2008 levels, which were also representative of gas prices in the previous years back to 2005.  Residential customers saved almost $17 billion in 2011 compared to 2008, commercial customers saved $10.5 billion, industrial consumers more than $30 billion and electric power companies more than $26 billion.  

Between 2008 and 2011, natural gas consumption was relatively flat for all users, so that the cost savings were entirely due to falling gas prices, and not decreased consumption.  For electric power companies, their usage actually increased by about 14% between 2008-2011, but that increased consumption was more than offset by a 43% reduction in the price they paid for natural gas.  

Based on the  historical consumption and price data, it's possible to make the following estimates of the annual savings on natural gas for every $1 reduction in the price of gas:

Residential consumers save $5 billion annually.

Commercial consumers save $3 billion annually.

Industrial consumers save $7 billion annually.

Electric power companies save almost $8 billion annually.  

Total savings of about $23 billion annually. 

14 Comments:

At 5/02/2012 12:21 AM, Blogger StVIS said...

Jim Chanos just got on the short bandwagon on shale gas producers for the short-term. I think shale gas production will be a valuable piece in America's energy future, but I don't see how producers make money off it with the current price climate; it's fairly common knowledge producers crave $6-$8 per thousand cubic feet.

I've been thinking for a while that the industry is heading for a necessary, and perhaps painful correction that will be needed to bring some semblance of long-term equilibrium in the sector.

 
At 5/02/2012 3:40 AM, Blogger vivi said...

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At 5/02/2012 6:24 AM, Blogger Ed R said...

The true total energy savings should be even greater as end users switch away from oil and coal.

Perhaps someone (Dr. Perry??) could find us some information on the relative costs of natural gas vs. oil vs coal on a uniform energy unit basis.

 
At 5/02/2012 6:28 AM, Blogger Rufus II said...

You all do realize that nat gas is up 20% in just the last couple of weeks, right? right?

 
At 5/02/2012 6:42 AM, Blogger Jon Murphy said...

You all do realize that nat gas is up 20% in just the last couple of weeks, right? right?

But down 50% from same time last year.

 
At 5/02/2012 6:53 AM, Blogger Rufus II said...

I read, somewhere, that 40% of the oil, and gas produced in Texas is from wells a year old, or less.

Meanwhile, nat gas Consumption is Up, and the number of rigs drilling in the Nat Gas plays is Down 50% from the peak.

You might want to be careful with that koolaid, folks.

 
At 5/02/2012 7:20 AM, Blogger marmico said...

Falling gas prices resulted in savings of about $84 billion in 2011 compared to an alternative scenario where gas prices had remained at 2008 levels, which were also representative of gas prices in the previous years back to 2005.

That's questionable. 2008 was peak. The 2005-2008 average price paid was about $205 billion. So 2011 savings of $50 billion is more representative.

Industrial use is about 30% of total use so savings of $15 billion.

You can certainly envision some expansion in the chemical and foundry sectors since natural gas as a percent of total energy use is higher than average.

Listen. Call me cynical or jaded but natural gas savings of $15 billion per year is not going to launch a "manufacturing renaissance" in a sector with gross value added of $1.8 trillion (12% of GDP).


In the alternative, the reduction in natural gas prices from 3% to 2% of gross value added in the manufacturing sector is not a game changer. It's industry hyperbole.

 
At 5/02/2012 7:33 AM, Blogger Rufus II said...

The "cheap, clean" nat gas meme was the fossil fuel industry's last, best hope for beating back "Renewables."

If nat gas goes back to $15.00 the only alternative to dirty coal becomes "Wind, and Solar." (and the only alternative to declining oil supplies becomes biofuels.)

 
At 5/02/2012 9:56 AM, Blogger Luther for Liberty said...

I doubt the commodity price reduction is translating into lower consumer prices because, 1) in a highly regulated industry, the energy companies rarely get the increases they need when commodities are high and NEVER request a reduction in rates when inputs are lower, 2) most power companies (at least where I live) are monopolies and therefore don't have the same market pressures to reduce price and improve quality.

 
At 5/02/2012 10:06 AM, Blogger Mark J. Perry said...

The EIA is reporting the ACTUAL prices paid for natural gas by residential consumers, which have gone DOWN by 18% on average between 2008 and 2011, see chart and the link to the EIA data. I have reported on Carpe Diem many utility companies that have LOWERED prices to residential consumers over the last year or so, including Consumers Energy recently in Michigan.

 
At 5/02/2012 10:07 AM, Blogger Jon Murphy said...

This comment has been removed by the author.

 
At 5/02/2012 10:37 AM, Blogger Hell_Is_Like_Newark said...

At current prices, I can generate my own power using a natural gas fired generator cheaper than I can buy it from the grid.

If I can figure out how to use the waste heat effectively, I might see a return on investment in four years or less.

 
At 5/02/2012 11:23 AM, Blogger VangelV said...

Jim Chanos just got on the short bandwagon on shale gas producers for the short-term. I think shale gas production will be a valuable piece in America's energy future, but I don't see how producers make money off it with the current price climate; it's fairly common knowledge producers crave $6-$8 per thousand cubic feet.

Chanos has access to the SEC filings and knows that the shale producers are at the edge of bankruptcy. While they could be saved by cheap loans I wonder who would be stupid enough to lend them cash at a low enough rate to prevent a rout.

As for the 'savings', they are more than likely to be offset by the losses that are incurred by malivestments based on the assumption of low prices lasting for long periods of time. Imagine building multi-billion dollar facilities based on the idea that companies can and will keep selling something for $2.50 that costs $7.50 to make.

 
At 5/02/2012 11:25 AM, Blogger VangelV said...

Perhaps someone (Dr. Perry??) could find us some information on the relative costs of natural gas vs. oil vs coal on a uniform energy unit basis.

It costs more to produce electricity from natural gas than coal if both the coal and gas are sold at cost by the producers. Utilities can produce electricity at a lower price if they can keep getting the natural gas for less than half that it costs the shale producers to get the gas out of the ground.

 

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