Why is natural gas so expensive right now?

Global supplies of natural gas are low just as winter approaches, driving up the price of electricity in the UK and Europe.
Global supplies of natural gas are low just as winter approaches, driving up the price of electricity in the UK and Europe.
Image: REUTERS/Phil Noble//File Photo
We may earn a commission from links on this page.

The price of natural gas remained far above average in the US, UK, and Europe on Sept. 20, driving an energy crunch that has raised fears of looming winter blackouts, forced electricity retailers to beg for taxpayer bailouts, and stuck homeowners with unusually high bills.

At $5.06 per million British thermal units, natural gas futures in the US are 9% more expensive than on Sept. 1, and double their price at this time last year.

The basic reason for the global price spike is a shortfall in inventory just as temperatures begin to dip (gas is the main fuel for home heating in the US and Europe). Gas stockpiles in the US are at least 7% below average; in Europe they’re more than 20% below average. Norway has agreed to increase gas exports to Europe.

Several factors came together to drain natural gas supplies: A prolonged, cold winter in 2020 in both the US and Europe; low gas prices and general economic uncertainty during the pandemic that induced many drillers to idle production; Hurricane Ida in August, which temporarily knocked out gas drilling in the Gulf of Mexico; low exports from Russia; fierce competition for shipments of liquefied natural gas with buyers willing to pay top dollar in Asia; and below-average electricity generation from hydropower dams in the western US and European wind farms, which forced grid operators to fill the gap with gas.

What high gas prices mean for companies

Seven retail electricity providers in the UK have already been forced out of business this year by high gas prices, as they’re forced by existing contracts and legal price caps to sell power to customers at a rate far below what they paid for it. On Sept. 20, the UK continued negotiations with Bulb and other leading providers about a potential bailout to prevent more companies from going bust—especially if they are forced to pick up new consumers that jump from foundering competitors.

Meanwhile, high gas prices are also a problem outside the electricity sector. The US fertilizer maker CF Industries Holdings, which uses natural gas as a key ingredient, closed two plants in the UK; a fertilizer shortfall could cause food prices to rise, as well as limit supplies of industrial CO2, a fertilizer byproduct that is used in carbonated beverages, slaughterhouses, and other food processing applications. Expensive gas also likely points to higher prices for plastics.

In a Sept. 20 research note, Bank of America analysts said they expect gas production to pick up in response to the higher prices, and projected them to fall back toward $4 by the end of this year. But they warn that one severe winter storm could easily throw the market off balance yet again.