CHAIRMAN JAMES INHOFE
SUBCOMMITTEE HEARING ON CLEAR SKIES LEGISLATION
May 8, 2003
Chart 1† Consumption (.pdf file)
Chart 2 Monthly Spot Prices (.pdf file)
Chart 3 Wellhead Prices (.pdf file)
Thank you, Mr. McSlarrow, for coming before us to testify on the natural gas markets and Clear Skies. Unfortunately, this hearing conflicts with an Armed Services mark-up that I need to attend. But Iíve come here for a few minutes to say how important this issue is to me, and also to express appreciation to Richard Metz of UniMark from Oklahoma who has made the trip here today to explain the pressures facing the natural gas industry.
This hearing will help us understand the relationship of clean air requirements to natural gas supply, price levels and price volatility. Natural gas is a vital fuel source in meeting our nationís energy requirements. Natural gas heats homes, creates electricity for power plants and industrial users, and is used as a feedstock in the production of many goods and services. In 2002, these sectors consumed almost 22 trillion cubic feet of natural gas.† Power plants generating electricity for the grid consume about one-fourth of that amount, as does the residential market. The remaining half is largely consumed by commercial and industrial users.
I am committed to maintaining a diverse fuel mix in the generation of our nationís electricity. Natural gas is an important and integral fuel in maintaining that diversity. Unfortunately, over the last decade, due to clean requirements, virtually all the power plants coming on line have been gas-fired. One of the strengths of natural gas historically was that it provided needed supplies at fairly stable and reasonable prices. I am concerned that this strength has been eroded by the over-reliance on gas to meet our electricity needs. And the effects are already becoming clear. While natural gas prices were fairly stable through the 1990s, the prices have become more volatile in recent years, as this chart shows. In 2000 and early 2001, average monthly natural gas wellhead spot prices climbed from about $2 to $9, then settled down to $2 at the end of that year. And again earlier this year, average prices climbed to more than $7, with prices spiking to $19 on February 25.
As this next chart shows, gas prices are not only becoming more volatile, but are projected to increase in real terms. As you can see, according Energy Information Administration reports, the 2003 projections of prices through 2025 are higher than for the same period than had been forecasted just the year before. But even 2003 projections now look overly optimistic given current prices of $6.
Of course, these price swings and price hikes do not occur in a vacuum. Part of this is due to limits on production and restrictions on constructing pipelines, which are issues I believe need to be resolved to help the industry continue supplying this critical fuel source. At the same time as gas production is facing increased challenges, demand has increased, and that demand is projected to increase more in the future, as this next chart shows.
This spike in demand has had adverse impacts on small businesses. Many fertilizer manufacturing plants, for instance, have gone out of business as the result of the price spikes over the last few years. Many manufacturers use natural gas not only to power their facilities, but in the production process itself. U.S. chemical producers are now the worldís highest cost producers because they are dependent on natural gas prices and prices are higher here than elsewhere in the world.
I remain concerned that, with the large amount of investment needed by coal plants to comply with the significant emissions reductions contemplated under Clear Skies, fuel switching could become even worse, despite rising prices.
As I have said before, one of my top priorities is to ensure that quality science drives policy and not the other way around. It is imperative that this Committee be sure the modeling assumptions used to justify the bill related to fuel switching, natural gas markets, and control technologies are accurate and objective. In future hearings on Clear Skies, I hope that the Administration will provide us with the necessary data to make these evaluations.
Mr. Chairman, I have testimony from the Aluminum Association and the Fertilizer Institute that I would like submitted for the record.