Many New Yorkers have recently suffered sticker shock from high energy prices. Utility bills have increased up to 25 percent over the last month. What’s causing this? Many factors, but mostly it’s a temporary problem of supply and demand in the natural gas market.

You might wonder why energy prices have risen so much when the state regulates the utility companies. First, the price of delivering energy to your home is regulated, but the price of natural gas is set by the market. So when the market price of natural gas goes up, the utility passes that increase on to you at the same cost they pay.

Second, if you’re heating with natural gas, you’re also having more delivered, so while the per-unit delivery cost doesn’t change, the total cost goes up. It’s like buying more bottles of water on a hot day; Even though the price per bottle doesn’t go up, you spend more.

So why has the price of natural gas gone up? Again, supply and demand. Supply is tighter than normal this year for several reasons, both domestic and international, and demand is high.

Tight Supplies

One part of the supply problem is an after-effect of the Covid-19 pandemic. As economic activity declined during the pandemic, demand for natural gas decreased. This pushed prices down, and in response gas companies reduced investment in gas production. As demand increased, production was slow to catch up.

Supply is tight in Europe, too. Russia reduced the amount of gas it sent to Europe in order to flex its geopolitical muscle. That, along with fear of a Russian invasion of Ukraine, has driven natural gas prices even higher in Europe than in the U.S. As a result, it’s more profitable for some U.S. producers to ship natural gas overseas, resulting in record U.S. liquified natural gas exports. Of course, gas sent overseas isn’t available to the American market.

Increased Demand

On the other side, demand has increased for at least two reasons. One is strong economic growth in the last quarter of 2021. This increased demand for natural gas for industrial uses while production was still low.

The other reason is colder than normal weather from the Great Lakes to the Northeast. Sure, winter always seems cold, but just a few degrees difference can require much more energy to keep your home warm.

Greater Reliance on Natural Gas

Another factor is the greater reliance on natural gas in downstate New York due to the closure of the Indian Point nuclear facility, which once supplied a quarter of New York City’s electricity. Nuclear energy is produced at a stable price, while natural gas is a commodity whose price is driven by international markets. Without Indian Point, power producers have had to turn to natural gas and other fossil fuels to produce the electricity it once supplied, increasing consumers’ exposure to the natural gas market.

When Will Prices Go Back Down?

That’s hard to say. In the short term, warmer weather as spring approaches should reduce demand, pushing prices back down. But if Russia invades Ukraine, either it or Europe could cut off the flow of Russian natural gas. That would increase European demand for gas produced elsewhere, including in the U.S.

In the longer term, a lot depends on the Biden administration’s policies on energy development, which have been a confusing mixture so far. Despite promises to limit drilling on public lands, the Biden administration has approved permits at a record pace. On the other hand, a federal judge recently ruled that leases in the Gulf of Mexico were granted improperly, so there may be fewer wells drilled there. Good luck to anyone trying to discern the future to make smart investments in this area.

What Can Be Done to Reduce Energy Prices?

Not much in the short term.

Governor Hochul has tried to direct the public’s anger toward the utility companies. Don’t fall for it. They’re at the mercy of the market, which is much bigger than any of them.

On the state level, there’s also little that can be done. New York could suspend (or better, eliminate) its gross receipts tax on utility companies. Like all business costs, these taxes are ultimately paid for by consumers, so suspending this tax would allow utilities to pass the saving on. But proposals to eliminate the tax have been around for at least twenty-five years, and it is still there. So don’t hold your breath.

Would Green Energy Be Cheaper?

Don’t bet on it. Solar power and onshore wind prices have fallen dramatically in recent years and are now very cost-competitive with natural gas. But according to a study by University of Chicago scholars, higher levels of renewables on the grid have led to increased costs for utility customers because of higher transmission and distribution costs. And offshore wind infrastructure is currently twice as expensive to build as a natural gas plant.

And neither wind nor solar are as reliable as conventional energy sources, so they would still need a reliable source of backup, most likely natural gas plants. Such plants would have to be built and maintained in readiness to operate, but would only be used occasionally, so their per-use cost would be higher than their current average use cost.

Conclusion

Overall Americans are experiencing the highest energy prices in eight years. This is part of a global phenomenon, as both natural gas and coal costs have increased worldwide. Unfortunately, in the U.S. this comes during the worst inflation in nearly half a century, when people can least afford it.

 

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