Here's What Exploding Natural Gas Prices Mean For The American Consumer

Supply bottlenecks combined with an unusually cold winter have cause natural gas prices to explode by nearly 50% since the beginning of the year. It’s by far the hottest commodity in the market.

“About half of all U.S. homes use natural gas as their main source of heating fuel, and nearly another 40 per cent rely on electricity, which is increasingly being generated from natural gas,” said Wells Fargo Securities’ Sarah Watt House and Michael Brown.

Fortunately for the U.S. consumer, these short-term moves are usually absorbed by speculators in the commodities futures market.

“[U]tilities buy natural gas using a mix of short- and long-term contracts, so households should not see their costs jump to the same degree as prices in spot markets,” added House and Brown.

“Moreover, as a share of overall expenditures, spending on natural gas remains small relative to other energy items,” they continued. “In 2012, natural gas services accounted for 0.7 per cent of total consumer expenditures versus 5.4 per cent on gasoline. Therefore, even with a jump in consumption, the rise in natural gas prices is less likely to take a crippling bite out of more discretionary household spending.”

While many consumers won’t even realise the bump in prices, the numbers will come through in personal consumption data via an increase in utilities spending. And this could take a tick off of the U.S. savings rate.

Eventually, this is a short-term story that will soon be forgotten.

“[P]rices should come down as we head into the seasonally warmer months,” said the economists.

It’s worth noting that we’ve seen much higher natgas prices (see chart below). Again, it’s largely been forgotten.

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