Lawmakers, no doubt, are preparing the syllabus right now for the winter semester course in their continuing economic education series.
This will be the one where they encourage constituents to hunt down and lynch the bandits who are to blame for their soaring heating bills.
They will rant and rave and want to round up the usual suspects–the natural gas companies, refineries, pipeline operators. They will hold hearings to rail about collusion and price fixing. They will, of course, refuse to give any credence to market forces at work.
You will recall their summer tutorial on gasoline, when prices briefly soared above $2 a gallon and there were screams of conspiracy.
The Federal Trade Commission’s preliminary report now concedes that a combination of pipeline breaks, tougher clean air standards, the peculiar ethanol blend used in the Chicago area, higher crude oil prices and soaring demand probably caused prices to soar.
Politicians knew that. But just as the market was correcting the temporary supply imbalance, Illinois lawmakers suspended the 5 percent state sales tax on gasoline. Now it will be interesting to see them explain why pump prices will be going up by 5 percent come Jan. 1., just as the higher heating bills really kick in.
That brings us back to the subject at hand.
Natural gas wellhead prices have about doubled over the last year, which will lead to sharply higher consumer heating bills this winter. The bills probably won’t double, but they are estimated to rise between 13 and 50 percent.
Natural gas pricing was partially deregulated in 1985 and totally deregulated in 1989. As a commodity that is subject to supply and demand fluctuations, natural gas prices are very volatile, rising steeply in the winter months when demand is high and falling sharply in the summer months.
But overall, natural gas has been a real bargain for a long time. On an average annualized basis, natural gas cost around $4 per thousand cubic feet before deregulation. From 1989 until this year, annual average prices were less than $2.50 and in several years even dropped below $2.
Those depressed prices have benefited consumers for a decade but provided little incentive for producers to find and harvest new supplies.
That has now changed. The booming economy has drained supplies of natural gas and cut into the reserve stockpiles the gas companies need to build in preparation for winter. That is driving the price up. But–this is the good news down the road–higher prices are also prompting more production. That, in turn, will mean more supply that will eventually bring prices down.
It will cost more to heat your home this winter. That will be a burden, but it will not be the work of sinister forces. It will be supply and demand at work.
But you can figure that page will be missing from the lawmakers’ class notes.
