Plunging worldwide oil prices will force the price of natural gas down 10 percent or more this year and save millions of dollars for residential and commercial customers, industry observers say.
"We are looking at another 10 percent decline in natural gas prices for residential consumers if oil holds at the currently depressed price," said Mike German, vice president of planning and analysis at the American Gas Association, which represents 300 utilities and pipelines.
Benjamin Schlesinger of Benjamin Schlesinger & Associates, a Bethesda natural gas consulting firm, said falling oil prices should drive the "spot" price -- or price paid by pipeline companies and utilities when no long-term contract is involved -- for natural gas down by between 15 and 20 percent by this summer.
Washington Gas Light Co. estimated that, if spot prices fall 5 percent, consumers would see a fuel savings of up to $3 million. The effect of a 20 percent drop translates into a savings of up to $12 million to the 575,000 customers of Washington Gas, which purchases about 30 percent of its gas on the spot market. Customers would experience a decrease in gas costs of between 1.5 and 8 percent, a Washington Gas official said.
"Spot gas prices will track falling oil prices, and that will enhance our ability to reduce our cost of gas on the spot market," another Washington Gas official said. " . . . If the spot prices continue to fall, that will affect overall prices, driving down natural gas prices still further."
Gas follows the rise and fall of oil prices because many of the largest energy customers can use either fuel. And, if oil prices fall far enough, those customers can threaten to switch fuels unless natural gas utilities lower their rates. Thus, there is intense competition for lucrative large commercial and industrial customers that can choose between natural gas and low-grade residual fuel oil, AGA's German said.
"As competition between natural gas and oil intensifies, that drives down the wholesale cost of natural gas to the benefit of all users, not just large customers with dual fuel capability," he said.
Baltimore Gas & Electric Co. already has lost two large industrial users to oil because of falling oil prices, said Glen Hefner, a BG&E spokesman. "Natural gas is going to respond to this . . . and be competitive as an industrial fuel again."
According to Schlesinger, gas markets are particularly sensitive, and therefore responsive, to oil markets because of bitter experience. "In 1983, rapid price increases pushed gas prices above those for heavy oil, and major sales to industrial customers were lost," Schlesinger said. "Retailers realized that natural gas can't be more expensive than heavy oil."
Even before the decline in oil prices, natural gas markets already were facing pressures to lower prices because of gradual decontrol of the natural gas market at the federal level and an excess supply of gas, said Frank Puziene, a consultant with the Washington firm of Foster Associates Inc. "The gas prices are already falling because of competition in gas markets," he said. "Oil prices will only reinforce it."
Deborah Waroff, a natural gas analyst with PaineWebber Inc., estimated the price of natural gas at the wellhead will fall from $2.50 to $2.29 per thousand cubic feet this year, a drop of almost 9 percent. "A good part of the story is pressure on gas prices from oil," she said.
R. Gamble Baldwin, a natural gas analyst with First Boston, said it takes a minimum of 90 days before falling oil prices translate into a threat to natural gas sales. "There are already indications that a couple of markets are seeing oil-to-gas competition, but as yet oil has not started to displace gas," he said.
Last month, falling oil prices in world markets pulled crude oil on the spot market below $20 a barrel for the first time since the late 1970s. The fundamental force driving prices down is the continuing oversupply of crude oil on world markets, resulting from Saudi Arabia's decision in the fall to boost its production dramatically.
The average price of crude oil is about $24 a barrel, analysts say. On the spot market, the price of oil dipped as low as $15.40 a barrel this month and closed yesterday at about $16.85 a barrel.