California's wholesale natural gas prices skyrocketed Wednesday to levels nearly double the steep tab paid last week and nearly 16 times the usual winter cost--a staggering increase that will eventually filter down to consumers.
An average of spot gas prices at the California border--a price that affects what most large users in the state pay--hit $36.25 per million British thermal units, with traders asking as much as $41. A year ago, the price was $2.30 per million BTUs, the standard measure for large natural gas trades.
Robust demand for natural gas, particularly for generating electricity, and a tightening in supply have California paying the highest prices in the U.S.
On the New York Mercantile Exchange, natural gas futures burned past previous records with the contract for January delivery closing at $8.485 per million BTUs, up $1.101. That was the first time natural gas prices rose above $8 in the 10 years that futures contracts have traded on the Nymex.
Meanwhile, the Energy Information Administration warned that winter heating bills will be "substantially" higher than the agency forecast just a month ago because of the recent surge in natural gas prices. Winter bills will jump 50% from a year ago in homes using gas, predicted the EIA, an arm of the Energy Department.
Luckily for consumers and small businesses, they are partly shielded from the volatile spot market for natural gas, although the latest increases will eventually boost home heating bills. California consumers are already being socked with increases on their November gas bills of 50% on average, with worse to come in December and January.
But large commercial and industrial users are being clobbered even harder. Analysts fear that prices of a broad range of consumer products and services could be affected.
"This is amazing," Fadel Gheit, senior energy analyst for the New York investment firm Fahnestock & Co., said of the $41 asking price for gas at the California border.
"The Mafia charges less. You can buy illegal drugs for less," Gheit said. "If this were oil, it would cost the equivalent of $240 a barrel" given the relative heat production of the two commodities.
High gas prices are helping to boost electricity prices, which hit the market limit of $250 per megawatt-hour for every hour of Tuesday and Wednesday--the first time the cap was reached for every hour of the day on the California Power Exchange, the state's primary market for electricity.
Southern California Edison said the natural gas price surge is even raising the price of electricity from sources that don't burn natural gas. SCE's power contracts with renewable sources--solar, wind, geothermal and biomass--are tied by law to the cost of natural gas.
SCE, a unit of Edison International in Rosemead, has appealed to the California Public Utilities Commission for emergency help, contending that high gas prices projected for December will increase renewable-energy costs by at least $115 million for the month if a different index to figure costs is not adopted. The PUC is set to take up the matter today.
Natural gas prices are highest in California for several reasons, said Seth Blumsack, an economist with Economic Insight Inc., a Portland, Ore.-based energy consulting firm.
Demand for natural gas has risen because of colder-than-usual weather and because of heavy use by California power plants, which primarily burn natural gas, he said.
In addition, pipelines into the state are running full or are at reduced capacity so that "spare capacity on the pipelines is going to the highest bidder," Blumsack said.
Supplies to California were sharply reduced after a deadly explosion in August along a major pipeline run by El Paso Natural Gas. The pipeline has been operating at 85% capacity ever since, as the company, a subsidiary of El Paso Energy Corp. of Houston, has been unable to complete repairs.
But there have also been allegations of market abuse. The PUC contends that El Paso has withheld capacity on the pipeline to boost prices, a charge El Paso has denied.
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Natural gas futures continued their relentless upward spiral, closing Wednesday at a record $8.49 per million British thermal units in New York. That's a nearly fourfold rise this year.
Weekly close and latest on the New York Mercantile Exchange
Wednesday: $8.49, up $1.10
Source: Bloomberg News