HOUSTON — Houston consumers will not see any great benefit from the low and sometimes negative natural gas prices at the trading hub in the Permian Basin.
Negative prices mean that the natural gas producers are paying people to take their gas. Why? First and foremost, the supply of natural gas in the Permian exceeds the demand for natural gas. There are several factors that have caused this.
1. The very mild winter reduced natural gas use across the nation. This means that natural gas storage facilities are still quite full and do not need to buy natural gas to prepare for the summer.
2. For many years, economists have pointed out that there are not enough pipelines to move natural gas out of West Texas. The late Yale professor Paul W. MacAvoy argued that because of federal price regulation that Wall Street would not finance the construction of new interstate pipelines in his book The Unsustainable Costs of Partial Deregulation.
3. The production of natural gas in the Permian is continuing to increase. Ordinarily, producers would slow production—especially if they must pay someone to take it off their hands—but most of the natural gas in the Permian is “associated natural gas” or natural gas that is produced alongside oil production. With the oil price more than $80 per barrel, it is very valuable, and natural gas is just a secondary consideration.
4. Just a couple of years ago, the oil producers would just vent natural gas into the atmosphere or flare it off. This practice has been limited by stronger state and federal regulations that limit the emissions of these two major greenhouse gases. Therefore, there is more natural gas to be sold.
This graph from the Energy Information Agency demonstrates the growth in natural gas production.
The low price of natural gas in West Texas does have an impact across the nation’s natural gas grid, but the buyers of natural gas in West Texas do not have to pass along their savings to consumers. (The buyers have to make a living too!) As this chart below shows, the natural gas price at the nation’s primary trading hub is historically low.
For the summer, this low natural gas price should benefit all consumers across the U.S. with somewhat lower electricity prices. That was the case for 2023 for everyone but Texas. See below where the wholesale electricity price was actually higher!! (The reason for that will be in another explainer)
