Bloomberg News

Shale Gas $100 Billion Savings to U.S. Exceed Tax Cuts: Energy

January 26, 2012

Jan. 26 (Bloomberg) -- Natural gas prices that slumped to a 10-year low this month could save U.S. consumers $16.5 billion on home energy bills over the course of a year, according to a senior economist at the U.S. Federal Reserve.

U.S. households might see total savings from lower gas prices of as much as $113 billion a year through 2015, including tack-on effects such as lower product prices and higher wages generated by cheaper fuel, according to energy industry consultants IHS Inc.

The projected savings is “an unbelievable amount of money,” said Greg Ebel, chief executive of Spectra Energy Corp., during a Jan. 17 interview. “That’s better than any tax cut you’ve seen out there, better than any government handout.”

If consumers end up pocketing more than $100 billion due to low gas prices, it could add a “significant” piece to U.S. gross domestic product growth for 2012 or 2013, said Robert Solow, professor emeritus at the Massachusetts Institute of Technology in Cambridge, who won the 1987 Nobel Prize in economics. “If that figure is right, it’s a substantial amount,” Solow said in a telephone interview yesterday.

The savings realized by the nation’s 113 million households will vary depending on location and how much gas makes up the home’s total energy bill. Gas utilities are passing along the lower prices they’re paying for the fuel because of a glut of new domestic production from hydraulic fracturing and horizontal drilling in shale formations.

Gas Price Plunge

The price of gas has plunged about 30 percent since the end of October on mild weather and oversupplies, according to data compiled by Bloomberg. Natural gas for next-month delivery fell to $2.322 per million British thermal units on Jan. 19, the lowest price since February 2002. Gas settled at $2.728 yesterday.

Consumers will likely spend about 95 percent of the direct savings they see from their gas bills, said Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University in Dallas. While that amount is a fraction of the $10.245 trillion in consumer spending for 2010, “it’s a step in the right direction,” Solow said.

Electricity prices, historically tied to the gas market, also are falling, although not necessarily for consumers. That’s because many power companies have raised rates to upgrade an aging power grid, install pollution controls and build new generators.

Typical Household Savings

The typical U.S. household gas bill this year would drop to $323.50 from $468.80 in the previous year at an average gas price of $2.50 per million British thermal units -- a savings of $145.30, said Mine Yucel, vice president and senior economist at the Federal Reserve Bank of Dallas.

Residents are forecast to pay about 25 percent less this winter for gas used in stoves, furnaces and fireplaces than they did in 2008, when the fuel last touched highs of more than $13.50, according to the U.S. Energy Information Administration.

“I think of shale gas as a real game-changer for consumers of natural gas,” said Hank Linginfelter, executive vice president of Atlanta-based AGL Resources Inc., in a telephone interview. “It’s having a significant impact on prices.’

AGL Resources, the largest standalone local U.S. gas distribution owner, said December bills have fallen on average 25 percent from a year ago at its utilities in seven states.

40 Percent Bill Trim

Iowa gas bills fell about 19 percent in December compared to the same month a year ago on lower demand and prices, MidAmerican Energy Co., owned by Warren Buffett’s Berkshire Hathaway Inc., said. Piedmont Natural Gas Co., based in Charlotte, North Carolina, has proposed cutting rates next month that would bring the average bill down by 40 percent since 2008.

Unseasonably warm weather has helped reduced gas bills. In December, average U.S. demand for heating was about 15 percent below normal, according to Weather Derivatives in Belton, Missouri. About 51 percent of U.S. households rely on gas for heating, according to the Energy Department.

Gas prices have been dropping since mid-2008, when a global recession sapped demand just as drilling accelerated in the gas- rich Marcellus shale in the eastern U.S., according to data compiled by Bloomberg.

The decline in gas has pushed average wholesale electricity prices paid by utilities down 50 percent since fourth quarter 2008, according to a Jan. 11 report from Standard & Poor’s. Meanwhile, retail rates paid by consumers have risen about 5 percent over a similar period, according to data from the Energy Department compiled by Bloomberg .

Locked-In Power Rates

Consumer rates for power are often locked in by state regulators, meaning the savings won’t always be passed along immediately to customers. Regulators may allow power producers to include costs for maintenance, repairs and new construction of plants and transmission lines in the rates they charge.

“Generally, we are seeing higher electricity rates because of the large infrastructure investments utilities have made over the last five years, although that’s being offset in part by lower energy costs,” said Travis Miller, a Chicago-based utility analyst for Morningstar Inc.

Southern Co.’s Georgia Power customers are now paying $19.59 more a month compared with the end of 2008 to cover the cost of building two nuclear reactors, pollution controls and other upgrades, according to an e-mailed statement from Atlanta- based Southern.

Power Bill Still High

“If power prices are going down, that’s certainly not reflected in the bills people are paying,” said Clare McGuire, director of the consumer energy program at Georgia Watch, an Atlanta-based consumer advocacy group.

Georgia Power customer Dan Cupertino said his monthly bills increased at times last year even when he was using less energy compared with the same period a year ago.

“I’m using less energy, but my bills are going up,” said the 61-year-old Cupertino, who is retired and lives in a five bedroom house in Fayetteville, Georgia, which is about 25 miles (40 kilometers) south of Atlanta. “It’s ridiculous.”

Rate increases will help Georgia Power pay for nearly $5 billion in spending for power lines, new gas plants, compliance with environmental rules and so-called smart-grid technology, said Christy Ihrig, a spokeswoman for Georgia Power, in an e- mailed statement.

Collecting money during the building of two new reactors at its Vogtle plant in Georgia will save customers $300 million in financing costs for the $14 billion project, Ihrig said.

Deregulated Difference

In deregulated electricity markets, where retail providers compete for customers, the drop in power prices passes through more quickly to consumers, said Paul Patterson, a New York-based utility analyst for Glenrock Associates LLC.

In Texas, which dismantled its power utilities so that almost all households buy power at competitive prices largely determined by the cost of natural gas, the average residential power rate fell 11 percent from 2008 to 2010, according to the Energy Department in Washington. Texas residences paid an average 11.60 cents per kilowatt-hour in 2010, according to the department.

Lower gas and power costs have muted some of the rate increases made by regulated utilities for infrastructure investments, pollution controls and new power plants, said Sam Brothwell, a senior utility analyst for Bloomberg Industries.

Transmission Costs

Fuel expenses typically make up the majority of consumers’ gas bills, which also include fees for delivery and transmission, according to the Energy Department.

Residents are forecast to pay $671 on average from October through March 2012, down 7.3 percent from last year’s winter period and nearly 30 percent from 2005, according to the U.S. Energy Information Administration. The average winter bill over that time period was $847.

Between 2012 and 2015, lower gas prices may result in total average annual household savings of $926, in part due to lower gas heating and electricity bills, according to a December report by the consultants IHS.

--With assistance from Jim Polson and Naureen S. Malik in New York, Julie Johnsson in Chicago, Mike Lee in Dallas and Robert Willis in Washington. Editors: Charles Siler, Susan Warren

-0- Jan/26/2012 17:32 GMT

To contact the reporter on this story: Mark Chediak in San Francisco at mchediak@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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