Why are natural gas prices so high?

Question

I live in New England - home heating oil is expected to be around $4.80-$5.00 a gallon this winter....the media, including T. Boone Pickens who is claiming to have a resolve - quotes that the U.S. has incredible natural gas reserves & it would be cheap to use....Natural Gas here is now almost $4.00 a gallon, it was $1.69 only 2 winters ago - Can anyone explain, other than GREED, the reason it is so HIGH right now if there is so much supply???

Answer 1

Well I don't think greed has much to do with it. High oil prices cause people to substitute away from oil use to other fuels - such as natural gas, solar power, wind power, etc. Therefore when oil prices rise quickly (as they have) people will move to a cheaper alternative (if possible) such as natural gas in this case. If enough people start using the substitute the price of the substitute also increases (as is currently being observed). The overall demand for energy has caused prices of all energy inputs to rise.

For evidence watch the price of oil and the price of natural gas or compare the movements in the price of oil with firms that specialize in natural gas. The example I like to point to is Chesapeake Energy (CHK) and the US Oil Fund. If you go to Google finance type in USO (the US oil fund that tracts the price of oil). When you see the graph go into the compare box and type in CHK. If you scroll out you will see the movements are highly positively correlated.

Concerning the supply side- well there could be a number of factors. First the demand may still outstrip the increase in the supply. Secondly, as with oil, it may be very costly and risky to explore for sources of natural gas. It also takes time to establish new fields. I also can't corroborate the claims that there is abundant supply or low supply- Pickens is an investor and as such I would take what he says with a grain of salt.

Answer 2

Well, considering how high oil prices are now and how fast they're rising, alot of people are turning to natural gas. I see the number of natural gas cars on roads here increasing daily. Apparently people feel that getting a more expensive natural gas car will be cheaper in the long term as the difference in amount paid for normal fuel and natural gas will offset the difference in cost of the cars. As demand for natural gas rises, so will the price. It's usual demand and supply economics, but of course, human greed also plays a huge role. Oil prices are often controlled by middle eastern governments or oil company oligarchies as well. The same thing applies for natural gas.

Answer 3

A rise in the price of a related substitute (natural gas:oil) is a determinant of demand that causes the demand for that good to increase as well, up until the point where the price elasticity of both products are equal.

In other words, cow's milk rises in price so people start demanding more soy milk  because they will get more for their money at the cheaper price, however, the increase in demand for soy milk means that people will bid up the price. Eventually the market place will bid prices up until the point where milk drinkers are indifferent between the two types, but changes in the market place usually prevent this.