What to expect for availability and prices of natural gas, motor fuels and electricity.

U.S. energy demand is projected to increase 32% over the next 20 years, forecasts the Energy Information Administration (EIA) in its 2001 annual energy outlook.

The core of the nation's non-motor fuel energy system is natural gas, and prices reached a record $10.10/thousand cubic feet (Mcf) on Dec. 27, 2000. This more than quadrupled the year-earlier price.

With a number of gas-fired electricity generating plants going on line last year, demand for natural gas has jumped. This, in combination with rising new home construction, has taxed U.S. production capacity, says Mary Hutzer, EIA's director of energy forecasting.

“At the heart of the increase in demand is the appeal of natural gas as a cleaner alternative to other fossil fuels such as coal and fuel oil,” she says. She adds that gas exploration and development have increased significantly, but the supply response isn't yet fully realized.

The levels of natural gas in storage were lower at the end of December 2000 than at any comparable time during the last seven years, says the American Gas Association (AGA). Stored gas accounts for about 20% of the gas consumed during a winter heating season. AGA reports, however, that storage shortfalls are rapidly being corrected.

The average 2000 wellhead price was $3.73/Mcf nationwide, a 72% increase from 1999. For 2001, assuming normal weather and EIA's projection of low underground storage levels through most the year (in contrast to AGA's prediction), the forecast calls for an annual average wellhead price near $5/Mcf.

A report by Canada's National Energy Board, however, predicts natural gas deliverability from Western Canada will increase significantly by 2002 due to the ongoing drilling boom. Western Canada supplies 15% of the gas consumed in the U.S. Natural gas demand in the industrial sector is expected to increase 7.5% in 2002.

Motor Fuel Outlook

Motor gasoline and diesel prices have backed down from last fall. With crude oil prices rebounding somewhat from December lows, combined with lower than normal stock levels, EIA projects modest price increases at the pump as the 2001 driving season begins.

EIA sees average annual crude oil prices declining $1-1.50/barrel in 2001 from the 2000 price of $27.60/barrel, and increasing by up to $5/barrel in 2002. Crude oil costs account for about 45% of the cost of gasoline and diesel fuel.

The situation of relatively low inventories for gasoline and distillates (heating oil and diesel fuel) could bring regional supply imbalances. This could bring significant price volatility in the U.S. gasoline and diesel fuel market.

Electricity Outlook

Average electricity prices vary substantially among U.S regions. Prices in the highest-cost region are 2.3 times those in the lowest-cost region. This winter, some residential customers paid 33.3¢/kilowatt-hour (Kwh) for power in California, up from 4.5¢ a year earlier.

Nonetheless, average national electricity prices are projected to decline from 6.7¢/Kwh in 1999 to 4.2¢/Kwh in 2005. Over the next 10-20 years, competitive pressures are expected to narrow the range in electricity prices currently seen across the country.

The critical electrical power situation in California — which uses 10% of U.S. electricity — highlights the interrelated tightness in both electricity and natural gas markets.

California lacks the pipeline capacity to provide enough natural gas to new power plants in development, let alone its current supply demands. The region is also short on the electricity generating capacity and transmission wires to deliver enough power into a market growing 4% annually.