By: Phil Kernen

Natural Gas 

Gas prices at the corner stations are going up. As of May 18, the average cost of gas in all fifty states exceeded $4 per gallon, about 25% higher than the average price one year ago. But that increase pales against the price increases for the natural gas used to fuel our comfort and economy. At $8.75 per million British Thermal Units (MMBTU), natural gas is at a 14-year high. Blame geopolitics and supply concerns.


Following the war in Ukraine, worldwide natural gas prices rose amid concerns about the trading relationships between Russia and Europe, because the former supplies the majority of natural gas imports to the latter. While natural gas remains free of sanctions for now, demand for Russian oil and natural gas exports has declined as Europe searches for alternative sources, adding external demand pressures to supply sources already dealing with growing domestic demands. While Europe redraws energy trading relationships to account for geopolitical considerations, long-term solutions will take time, keeping prices higher than usual.   

Supply concerns

At the same time, supply concerns are impacting prices in the U.S. While natural gas demand has recovered from the impact of the pandemic, supply has not. Too few pipelines are available to move the fuel due to high costs, lawsuits, and reduced investment from energy firms following the pandemic.

In the U.S., natural gas inventory is typically built up over summer and fall and drawn down in winter and spring. This past winter, producers could not keep up with demand for natural gas which resulted in more withdrawals from storage than usual. In spring, hot weather in many parts of the U.S. kept demand high through heavier use of cooling systems. By the end of March, the smallest amount of natural gas was held in U.S. underground storage in the Lower 48 states since 2019, 17% lower than the five-year average.

Also fueling higher prices in the U.S. is the growing demand for liquefied natural gas (LNG), of which the U.S. is now the biggest producer, exporting 20% of natural gas production. The U.S. is operating near full capacity, so material production increases aren’t likely unless investors create more export infrastructure or if the political atmosphere towards oil and gas drillers changes to encourage more investment.


Unlike gasoline prices, increases in the price of natural gas aren’t always immediately visible and show up indirectly in several ways. The most significant use for natural gas, 38%, goes towards electricity production, and forecasts of hotter summer temperatures will add pressure on the available supply. 33% of natural gas goes to industrial uses such as refining and fertilizer plants, placing downstream pressure on gas and food prices. And 15% goes towards residential applications such as heating and cooking. Expect to see higher gas costs from your gas utility if you don’t already.

In its fight against inflation, the Federal Reserve will have little effect on our aggregate demand for natural gas and other commodities.

Global prices

Prices are higher overseas. Over the last several decades, natural gas has become a balancing force between the goals of addressing climate change and satisfying the needs of energy consumers worldwide. Concurrently, changes to the economics of liquefying natural gas (LNG) allowed for increased export and transport by LNG carriers, allowing natural gas to evolve beyond a regional product to a global commodity. Australia, Qatar, and the U.S. are the three biggest LNG exporters.

As we await more export infrastructure, natural gas doesn’t yet trade globally like oil, still selling at different prices in different parts of the world. Traders base U.S. prices on the cost of gas transported domestically by pipelines. Much of Europe and Asia don’t have domestic supplies like the U.S., so they import most of what is needed. Accordingly, European and Asian benchmarks are calculated based on the price of LNG, which is more costly. The upshot is that European prices for natural gas are near $30 and Asian prices are slightly less at $24 per MMBTU.

As we study inflation to assess when and where it will peak, keep rising natural gas prices in mind. Due to the integral role of natural gas in our daily economic activities, unless demand falls or supply increases, inflation may be much stickier than we think.