Who’s Really Cashing In On the Fracking Boom

A pedestrian walks amidst the newly fallen snow along Grandview Avenue on November 26, 2013 in Pittsburgh, Pennsylvania. Along the East Coast winter storms are threatening to make Thanksgiving holiday travel dangerous.
National Journal
Patrick Reis
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Patrick Reis
Dec. 2, 2013, 3:53 p.m.

Frack­ing has sent the price of nat­ur­al gas plum­met­ing, just not for the people who need it most.

The straight-out-of-the-ground price of nat­ur­al gas is way down since the start of the boom in hy­draul­ic frac­tur­ing. Back in 2008, users buy­ing gas dir­ectly from drillers were pay­ing an av­er­age of $7.97 per thou­sand cu­bic feet, ac­cord­ing to the En­ergy In­form­a­tion Ad­min­is­tra­tion. By 2012, that cost — known as the “well­head” price — had dropped to $2.66 in nom­in­al dol­lars (not ad­jus­ted for in­fla­tion) res­ult­ing in a two-thirds dis­count in just five years.

However, those are the prices paid by pipeline op­er­at­ors, util­it­ies, large in­dus­tri­al users, and oth­er en­tit­ies that can buy gas dir­ectly from the com­pan­ies that drill for it.

By the time gas was piped in­to homes, in­di­vidu­al con­sumers were still pay­ing an av­er­age of $10.68 per thou­sand cu­bic feet. That’s down from $13.98 in 2008, but the $3.30 price drop is much smal­ler — both in ab­so­lute and re­l­at­ive terms — than the one that big buy­ers are get­ting fur­ther up the chain.

And con­sumers are about to give some of those gains back. The EIA pro­jects that heat­ing costs for res­id­en­tial cus­tom­ers us­ing nat­ur­al gas will rise by an av­er­age of 13 per­cent this winter, adding an ad­di­tion­al $80 to the typ­ic­al house­hold’s en­ergy bill over the course of the sea­son.

The up­com­ing price hike is a stick­ing point for the nat­ur­al-gas in­dustry as it tries to use the prom­ise of eco­nom­ic be­ne­fits to sell the pub­lic on frack­ing. And for cus­tom­ers, it’s a set­back at a time when real wages are largely stag­nant, house­hold budgets are tight, and large-scale price cuts would mean much-needed re­lief.

None of this is to say the lower gas prices haven’t been help­ful for con­sumers; the last few years of fall­ing per-unit costs have re­versed price in­creases that had spiked dur­ing the mil­len­ni­um’s first dec­ade.

People close to some of the most vul­ner­able buy­ers of home heat­ing see how it’s help­ing their con­stitu­ents.

“About six years ago, when nat­ur­al-gas prices were high, it was a real crisis,” said John Wells, who dir­ects the home-heat­ing as­sist­ance pro­gram at Ac­tion for Bo­ston Com­munity De­vel­op­ment. “Low nat­ur­al-gas prices have been a god­send to low-in­come fam­il­ies.”

And low nat­ur­al-gas prices help house­holds in areas oth­er than heat­ing. Cheap gas has cut costs for in­dus­tri­al users and elec­tri­city gen­er­at­ors, who in turn pass some of those sav­ings to con­sumers.

In­deed, in­dus­tri­al buy­ers are also catch­ing a deep­er dis­count than in­di­vidu­al house­holds. In 2008, in­dus­tri­al users were shelling out $9.65 per thou­sand cu­bic feet of nat­ur­al gas. In 2012, that was down to $3.86, a price level they hadn’t en­joyed since 1999.

So what ac­counts for the sav­ings gap between large users and small ones? It’s tempt­ing to blame util­ity com­pan­ies, which at first blush ap­pear to be buy­ing low and selling high.

But — so long as the na­tion’s reg­u­lat­ory sys­tem is work­ing prop­erly — that can’t hap­pen, says Amy Sweeney, a nat­ur­al-gas spe­cial­ist at the EIA. Util­ity com­pan­ies are sub­ject to a pub­lic com­mis­sion that has fi­nal say over the rates they can charge. And in set­ting those rates, the reg­u­lat­ors and util­it­ies are sup­posed to pass any fuel cost changes — up or down — to their cus­tom­ers.

In­stead, util­ity rates vary based on how much a com­pany spends on con­nect­ing cus­tom­ers with the gas sup­plies, and that’s where con­sumers may see new costs. As gas has got­ten cheap­er, more cus­tom­ers are look­ing to get it de­livered to their homes and busi­nesses, and that has driv­en de­mand for util­it­ies to ex­pand the pipelines and oth­er amen­it­ies they use to de­liv­er gas to homes.

And un­like raw-ma­ter­i­al costs, those in­fra­struc­ture costs do get passed from util­it­ies to con­sumers in the form of high­er gas bills.

“To some ex­tent, what a con­sumer pays is go­ing to fol­low, at a lag, the en­ergy mar­kets,” Sweeney said. “But oth­er things — a hook­up charge, a de­liv­ery charge, taxes — those can be a pretty strong com­pon­ent of what a cus­tom­er pays.”

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