>>California's Gas Pains Are Hardly Natural
By Allan Brady 12/13/00 12:00 PM ET
California is in the midst of an energy crisis. Over the past week,
there was a stage 3 electrical emergency on Thursday, which
resulted in service interruptions for some customers. Stage 2 alerts,
where large industrial commercial users are forced to curtail usage,
have become the norm in California. The causes of California's
troubles are wide in scope, but perhaps the most salient culprit for
the current crunch is the high price of natural gas. The price of
natural gas in California is now selling at five times the industry
standard Henry Hub price, the Louisiana delivery point for natural gas
futures (see chart below). Nationwide, natural gas has been pushed
skyward by low stocks, cold weather, and inflexible supply. California
suffers from all these factors in addition to a host of others. This begs
the following questions: why are prices so much higher, and will
prices return to earth before the heating season comes to an end?
The most obvious reason for higher prices this year is the abysmal
state of inventories, which are particularly low in the West.
Nationwide, the amount of natural gas in storage is 17% lower than it
was last year. For the West, stocks have dropped to 26% below
year-ago levels. Unfortunately, the especially low inventories in
California are symptomatic of other problems.
Demand for natural gas in California is driven, to a much larger
degree than elsewhere in the nation, by electricity use. About 31% of
all electricity produced in California comes from natural gas versus
15% for the U.S. as a whole. Understandably, the increased reliance
on natural gas for electricity generation would make the state more
vulnerable to low stocks. This year, however, a drop in production
from other power sources is applying additional pressure on prices. A
full 11,000 MW of power is currently out of service in the state, about
10% of total state generating capacity, and the availability of
hydroelectric power across the West is poor due to low water levels.
As a result, the production of electricity from natural gas jumped from
40,000 million kilowatthours to 57,000 million killowatthours (utility
and nonutility generation) in the first seven months of the year. The
pressure on natural gas as a provider of electricity has likely stiffened
since July.
Deliverability is also a problem for California. While demand for
natural gas has ballooned in the state, the system of interstate and
intrastate pipelines has not grown nearly as quickly. This has left the
market relatively isolated from supplies in the rest of the nation. The
lack of adequate infrastructure limits the opportunities for arbitrage
across regions and has kept prices high in California.
Also, the possibility that prices in California will fall back to normal
this heating season, or at least move to their traditional place slightly
above the national level, is unlikely. A period of unseasonably warm
weather would help a great deal, but since such a weather event is
not in the forecast, and electricity markets remain relatively
hamstrung, Californians are in for an expensive winter. In the long
term, rectifying the availability of pipeline capacity into the state will
take years, as well as building up supplies to meet growing demand.
Moving forward, California will almost inevitably be more dependent
on natural gas because of the phasing out of nuclear power and the
state's avoidance of coal. All told, these concurring factors have
quietly conspired to land a blow to California natural gas consumers,
and the impact on the state's economy will linger.<<
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