Good news for electricity consumers: Natural gas prices are stuck in the mud and show no signs of increasing anytime soon

Natural gas generated electricity is offsetting the high cost of wind, solar and battery storage.

An old joke about economists is that parrots can be trained to be economists by teaching them to say “supply and demand” because that is how economists explain almost everything. While supply and demand may not explain everything, they explain why natural gas prices have declined over a year and remain stubbornly low. Natural gas supplies have continued to rise, pushing prices down:

Natural gas prices are currently about where they were in the late 1990s and even lower on an inflation-adjusted basis.

Oil and gas companies learned about over-drilling the hard way when natural gas prices cratered due to oversupply starting in 2015, causing many shale drilling companies to go broke. Investors told them never to do that again, and they listened. But this glut of natural gas is different. While natural gas companies have reduced their drilling for natural gas, crude oil drillers are going full speed ahead, and the oil they produce has natural gas mixed with it, which they get for free.

This is especially true in the largest oil field in the U.S., the Permian Basin in West Texas, where crude oil wells produce huge amounts of natural gas, referred to as “associated gas,” as shown in these graphs of crude oil and natural gas production:

Crude oil producers don’t want natural gas, so they are willing to eliminate it any way they can. They will even sell it for a negative price, meaning they will pay someone to take their gas if that is what it takes to keep the crude oil flowing.

While low natural gas prices are bad news for natural gas producers, they are good for electricity consumers because natural gas is the largest source of electricity generation in the U.S. It is a not-well-known fact that every electricity grid in the U.S. depends on natural gas for almost half of the electricity generated, some more and some less, as shown by the top line in the graph below:

In other words, the low price of natural gas is helping offset the high cost of electricity produced by wind and solar and the very high cost of battery storage, which is coming online to deal with the high intermittency of wind and solar electricity generation. Increases in electricity prices would be much greater if it were not for low natural gas prices:

Expectations are that natural gas will remain low for the foreseeable future. In fact, natural gas futures reflect the expectation of even lower prices for natural gas. According to a Wall Street Journal report, “Put” options in future months, contracts that convey the right to sell gas at a stated price, have traded as low as 50 cents per million BTUs. One trader said, “The market is of the opinion that we could go there.” If that happens, natural gas will continue to put even greater downward pressure on electricity prices.

Unfortunately, natural gas’s ability to keep overall electricity prices down will be increasingly offset by the continuing onslaught of wind, solar, and battery storage that U.S. power grids are adding, in part due to the seemingly unending subsidies coming from the grossly misnamed “Inflation Reduction Act.”

My take: Hopefully, the upcoming election will lead to the early death of the Inflation Reduction Act and the EPA’s power plant rules. Both were designed to force an energy transition by eliminating coal and natural gas baseload power generation. Otherwise, electricity prices will soar, and grid reliability will deteriorate.

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