The Market Works (pt. 2)
A couple weeks ago, I commented on the fact that oil consumption in the U.S. dropped 3% in the wake of higher post-hurricane prices. This reduced demand has led to a collapse in gasoline prices at the pump, with the price of gas here in Minneapolis now about 20% below pre-Katrina (it was about $2.45/gallon before Katrina hit, and is now just barely above two bucks).
The same thing is happening in natural gas. A few days ago, a report came out showing that demand for natural gas is down, and is expected to stay down for the rest of 2005. As a result, the price of gas has collapsed, dropping to under $9/million BTU. The futures markets are lagging the spot market, but unless demand springs back up it is probably fair to assume that the futures prices will come in line.
Part of the drop in demand is due to warmer-than-normal weather here in the upper midwest. But a big chunk in the drop is also due to millions of consumers making the decision to turn down their thermostats to save money.
Unfortunately, our gas company only sets prices once per month, and the November gas price has already been set at $1.39/therm, up from $1.33/therm in October, and up from $1.00/therm last year (one therm is 100,000 BTU, so if the spot market price for gas is $9/million BTU, that's $0.90/therm. The gas company adds about $0.11/therm for distribution, so if the gas company had set the price today it would be right around $1.00/therm). For the rest of the month we'll still be paying the higher price, though it is probably fair to assume that the December price will be considerably lower.
Of course, if there's a big cold snap, then demand will inevitably go back up and all bets will be off.
My reaction is mixed. On the one hand, I'm pleased to see that the market is working as it should, and that demand is dropping and prices are coming down.
On the other hand, a lower gas price means we won't save as much money with wood heat this winter. At $1.50/therm, every time I fire up the wood stove with a full load of firewood, it will save us around $4-$5. But at $1.00/therm, we only save $2 or $3. Repeat that enough times over the course of the winter, and it makes a big difference in the amount of money we save.
Put another way, if the goal is to save $1,000 on our heating bill this winter (remember that the wood stove insert costs about $3,400), I'll have to burn about 225 loads of firewood if gas costs us $1.50/therm. But I need to burn about 350 loads of firewood if gas is only $1.00/therm.
Of course, if gas is cheaper we wind up paying less overall. It just doesn't give us as much fun in being able to boast of huge dollar savings.