Get used to high natural gas prices

COLUMBUS – Americans may never again see 99-cent gasoline at the pumps.

Likewise, farmers should be prepared to accept the possibility of higher than normal natural gas prices over the next several years.

Long-term problem. Long-term production problems in the industry are keeping natural gas prices elevated this year and raising concerns across the country, says Matt Roberts, Ohio State University ag economist.

“What is happening is not because of short-term problems but because of long-term structural problems,” Roberts said.

“It’s one of the reasons (Alan) Greenspan has discussed this with Congress and one of the reasons (President) Bush has talked about it.”

Depleting reserves. The structural problems Roberts is referring to are the continued depletion of natural gas reserves in the United States, inaccessibility of new sources due to location or federal laws, and higher production prices at current drilling locations. All drive up the cost for end users.

“Natural gas is a fossil fuel; it is not a renewable resource, and America’s easily accessible gas reserves are being rapidly depleted,” he said. “Many of the areas in America where we pull gas out of, like the Gulf of Mexico and the California coast, are becoming depleted.”

Harder to access. The problem, he added, is that most of the remaining natural gas reserves are either in deep water, which is much harder to explore, and therefore produce more expensive gas, or are located in areas that are currently off-limits to exploration, such as the eastern Gulf of Mexico, some areas off the California coast, the mid-Atlantic coast, parts of Alaska and many federal lands in the western United States.

No quick fix. Roberts stated that access to low-cost reserves or the construction of transportation – for example, a natural gas pipeline from Alaska to the U.S. mainland – is required to solve some of the problems the natural gas industry is facing.

“Neither of these solutions, however, will happen overnight. There is political opposition to drilling in new areas and the construction of a pipeline would take 10 to 15 years,” Roberts said.

“Even if tomorrow Congress allowed unrestricted drilling throughout the United States, it takes time to get those new wells on line. We would still be looking at two to three years of seasonally increased volatility in the natural gas market.”

Fertilizer price hike. Farmers may have to prepare themselves for potentially high fertilizer prices in the future.

“I would start paying more attention to the natural gas market,” Roberts said.

“Farmers should start to think about natural gas as an actual business risk to their enterprise and start to think what they need to do to manage that risk in the same way they manage the price risk for production.

“I think the reality for most farmers is that higher natural gas prices means increased forward contracting with fertilizer dealers and accepting that the cost of production of fertilizer-intensive crops has increased.”

Current market. Natural gas prices are currently running just over $5 per million British thermal units, a drop from $6.50 or $7 spring prices.

Roberts said the drop is due to the relatively cool summer much of the nation is experiencing.

“Natural gas prices tend to go up in response to hot summers and cold winters. And one thing we’ve seen so far this summer are relatively mild temperatures,” Roberts said.

If it remains a cool summer, Roberts said we could go back to talking about relatively normal natural gas prices.

If the remainder of the summer becomes exceptionally hot, however, inventory will stop building and “we may go into a decline.”

Price curve shift. Though the weather may have a factor on short-term price fluctuations, in the long run, natural gas prices are expected to remain higher than normal.

“We may be looking at about $4.75 to $5.25 as that being the normal equilibrium price,” Roberts said.

“What that means is more worries for farmers about natural gas prices come this fall and next spring, and the fertilizer price spikes that will go along with that.”