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Natural gas is believed by many to be the most important energy source for the future. The abundance of natural gas, worldwide as well as domestically, coupled with its environmental soundness and multiple applications across all sectors, means that natural gas will continue to play an increasingly important role in meeting demand for energy in the United States . The Energy Information Administration, in its Annual Energy Outlook 2009 , estimates that natural gas demand in the United States could be 24.36 Tcf by the year 2030 . That is an increase of six percent over 2007 demand levels , as compared to an expected total energy consumption increase (from all sources) of 12 percent (from 101.89 quadrillion British thermal units to 113.56 by 2030 ). The EIA predicts an annual demand increase of 0.5 percent over the next 21 years and it is important to note that this steady climb in demand for natural gas could increase as climate change legislation grows demand for low-carbon fuels such as clean natural gas. While forecasts made by different Federal agencies may differ in their exact expectations for the increased demand for natural gas, one thing is common across studies: demand for natural gas will continue to increase steadily for the foreseeable future.

Natural Gas Demand

 
 

There are many reasons for the long term expected increase in natural gas demand. As can be seen, demand for all types of energy, save nuclear and hydro power, is expected to increase over the next 20 years. This general upswing can be attributed to the expected general growth of the U.S. economy and population in the future.

 

Factors Affecting Short Term Demand

Demand for natural gas has traditionally been highly cyclical. Demand for natural gas depends highly on the time of year, and changes from season to season. In the past, the cyclical nature of natural gas demand has been relatively straightforward: demand was highest during the coldest months of winter and lowest during the warmest months of summer. The primary driver for this primary cycle of natural gas demand is the need for residential and commercial heating. As expected, heating requirements are highest during the coldest months and lowest during the warmest months. This has resulted in demand for natural gas spiking in January and February, and dipping during the months of July and August. Base-load storage capacity is designed to meet this cyclical demand: base-load storage withdrawals typically take place in the winter months (to meet increased demand), while storage injection typically takes place in the summer months (to store excess gas in preparation for the next up cycle).

The relatively recent shift towards use of natural gas for the generation of electricity has resulted in an anomaly in this traditional cyclical behavior. While requirements for natural gas heating decrease during the summer months, demand for space cooling increases during this warmer season. Electricity provides the primary source of energy for residential and commercial cooling requirements, leading to an increase in demand for electricity. Because natural gas is used to generate a large portion of electricity in the United States , increased electrical demand often means increased natural gas demand. This results in a smaller spike in natural gas demand during the warmest months of the year. Thus, natural gas demand experiences its most pronounced increase in the coldest months, but as the use of natural gas for the generation of electricity increases, the magnitude of the smaller summer peak in demand for natural gas is expected to become more pronounced.

In general, in addition to this cyclical demand cycle, there are two primary drivers that determine the demand for natural gas in the short term. These include:

  • Weather - as mentioned, natural gas demand typically peaks during the coldest months and tapers off during the warmest months, with a slight increase during the summer to meet the demands of electric generators. The weather during any particular season can affect this cyclical demand for natural gas. The colder the weather during the winter, the more pronounced will be the winter peak. Conversely, a warm winter may result in a less noticeable winter peak. An extremely hot winter can result in even greater cooling demands, which in turn can result in increased summer demand for natural gas.
  • Fuel Switching - supply and demand in the marketplace determine the short term price for natural gas. However, this can work in reverse as well. The price of natural gas can, for certain consumers, affect its demand. This is particularly true for those consumers who have the capacity to switch the fuel upon which they rely. While most residential and commercial customers rely solely on natural gas to meet many of their energy requirements, some industrial and electric generation consumers have the capacity to switch between fuels. For instance, during a period of extremely high natural gas prices, many electric generators may switch from using natural gas to using cheaper coal, thus decreasing the demand for natural gas.

U.S. Economy - The state of the U.S. economy in general can have a considerable effect on the demand for natural gas in the short term, particularly for industrial consumers. When the economy is expanding, output from industrial sectors is generally increasing at a similar rate. When the economy is in recession, output from industrial sectors drops. These fluctuations in industrial output accompanying economic upswings and downturns affects the amount of natural gas needed by these industrial users. For instance, during the economic downturn of 2001, industrial natural gas consumption fell by 6 percent. Thus the short term status of the economy has an effect on the amount of natural gas consumed in the United States .