Like all commodity markets, gas prices are based upon margins – the highest price a person is willing to pay. The marginal buyer, the one who is willing to pay an inflated price, sets the price for everyone else. Their buying power inflates or deflates the market depending upon supply and demand.
Increased Sales Beyond U.S. Borders Mean Increased Gas Prices
When it comes to the U.S. gas market, sales beyond our borders have raised the cost of gas and are continuing to do so. Supply and demand is making the marginal buyer willing to pay more.
Where specifically beyond our U.S. borders is the demand occurring? Mexico is currently one of the largest buyers.
Mexico’s Increased Imports Bringing Gas Prices Up
Between 2003 and 2008, Mexican drilling companies increased their production from 4.5 billion cubic feet per day (Bcf/D) to 7.5 Bcf/D. But, when the bottom fell out of the market in 2008, the Mexican government made a strategic decision – rather than filling their domestic needs with drilling from their own local companies, they began importing.
Since then, gas production from the large Mexican gas companies has fallen at a steady pace. Lack of production has also significantly decreased Mexican gas reserves, dropping it from 60 thousand cubic feet (Tcf) in the late ’90s to only 17 Tfc today.
Coincidentally, Mexican gas consumption has consistently risen. Since 2007, it has jumped 16.7 percent. A large part of this consumption is for power generation due to the country’s shifted from their oil-fired power generation. Now, 50 percent of their power is produced by natural gas.
U.S. Exporting to Mexico
Currently, the U.S. is exporting 3 percent of our natural gas production to Mexico. As of March 2013 that equals roughly 69 Bcf/D. But, with at least six new pipeline projects slated to send even more gas south of the border, this percentage is predicted to increase to 5.5 percent.
How big are these numbers? What does this really look like for you? In 2012, when the power sector created an extra 5 Bcf/D demand for natural gas, U.S. natural gas prices doubled. They went from $2 per thousand cubic feet (Mcf) to $4 per Mcf.
Even with the new pipelines projects in the works, large players in the U.S. gas market predict the demand in Mexico will ride beyond capacity. As supply and demand continue to shift, the marginal buyer’s price point will increase.
Regulations Could Get in the Way
While it’s natural to correlate increased supply with a growing U.S. gas market, there are still a few potential wrinkles of which you should be aware. Most of these are regulatory.
Up until now, the U.S. Federal Energy Regulatory Commission has steadily approved permitting for expansions. But, other groups are looking to make these projects more difficult.
For example, in early June of this year Calpine Energy Service filed a Motion to Intervene in the hopes of stopping (or at least delaying) an export expansion project in southern Texas. Why does Calpine Energy Service not want the export expansion to happen? Money. While their Motion to Intervene does not explicitly state that they are worried about the currently low prices of natural gas rising, it’s a safe bet this is a major concern for them.
Will these U.S. groups continue to try and stop the increase of exports? Yes. Will it do any good? Maybe. In all likelihood, mining pumps in the U.S. will keep working at full capacity. Gas companies will keep selling to the buyer who is willing to pay the most. And, gas exports to Mexico will increase.
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