The summer heat wave that has gripped much of the US and Canada is not only making people sweat, but also driving up the prices of gas. The high demand for electricity to power air conditioners and fans has strained the power grid and reduced the supply of natural gas, which is used to generate electricity in many regions. As a result, gas prices have risen sharply in the past week, reaching levels not seen since 2014.
How High Are Gas Prices Now?
According to the US Energy Information Administration (EIA), the average price of natural gas for electric power generation was $5.75 per million British thermal units (MMBtu) on July 31, 2023, up from $3.64 per MMBtu a month ago and $2.19 per MMBtu a year ago. This is the highest price since February 2014, when a polar vortex caused a spike in gas demand and prices.
The EIA also reported that the average retail price of regular gasoline in the US was $3.36 per gallon on August 1, 2023, up from $3.15 per gallon a month ago and $2.18 per gallon a year ago. This is the highest price since October 2014, when global oil prices were falling due to oversupply.
In Canada, the situation is similar. According to GasBuddy, a website that tracks gas prices across North America, the average price of regular gasoline in Canada was C$1.51 per liter on August 2, 2023, up from C$1.38 per liter a month ago and C$1.05 per liter a year ago. This is the highest price since July 2014, when global oil prices were still high.
What Is Causing the Gas Price Hike?
The main factor behind the gas price hike is the heat wave that has affected most of the US and Canada since late July 2023. According to the National Oceanic and Atmospheric Administration (NOAA), July 2023 was the hottest month on record for the contiguous US, with an average temperature of 77.6°F (25.3°C), 2.7°F (1.5°C) above the 20th century average. The heat wave also broke several daily temperature records in many cities, such as Portland, Oregon; Seattle, Washington; Las Vegas, Nevada; and Salt Lake City, Utah.
The high temperatures have increased the demand for electricity to cool homes and businesses, especially during peak hours. According to the EIA, the US electricity demand reached 742 gigawatts (GW) on July 28, 2023, the highest level since August 2016. The EIA also projected that the US electricity consumption in July 2023 would be 11% higher than in July 2020 and 5% higher than in July 2019.
To meet this demand, power plants have been burning more natural gas, which is the largest source of electricity generation in the US and Canada. According to the EIA, natural gas accounted for 40% of US electricity generation in July 2023, up from 35% in July 2020 and 37% in July 2019. In Canada, natural gas accounted for 10% of electricity generation in July 2023, up from 8% in July 2020 and 9% in July 2019.
However, the supply of natural gas has not kept up with the demand, leading to a tight market and higher prices. According to the EIA, the US natural gas production was 92 billion cubic feet per day (Bcf/d) in July 2023, down from 95 Bcf/d in July 2020 and 99 Bcf/d in July 2019. The EIA attributed this decline to lower drilling activity and maintenance outages at some gas fields due to low prices in previous months.
In addition, some regions have faced supply disruptions due to pipeline constraints or wildfires. For example, in California, where natural gas accounts for about half of electricity generation, a major pipeline that transports gas from Arizona was shut down on July 30 due to a fire near its compressor station. This reduced the gas supply to California by about 500 million cubic feet per day (MMcf/d), or about 10% of its normal level.
Similarly, in British Columbia, Canada’s largest gas-producing province, several wildfires have threatened some gas facilities and pipelines, forcing some producers to reduce output or shut down operations temporarily.
What Are the Impacts of the Gas Price Hike?
The gas price hike has had significant impacts on both consumers and producers of gas and electricity. For consumers, the higher gas prices have translated into higher electricity bills and gasoline costs. According to the EIA, the average US residential electricity price was 13.8 cents per kilowatt-hour (kWh) in July 2023, up from 13.2 cents per kWh in July 2020 and 12.9 cents per kWh in July 2019. The EIA also projected that the average US household would spend $426 on electricity in July 2023, up from $373 in July 2020 and $362 in July 2019.
Similarly, the higher gasoline prices have increased the cost of driving for motorists. According to the EIA, the average US household would spend $215 on gasoline in July 2023, up from $144 in July 2020 and $186 in July 2019.
For producers, the higher gas prices have boosted their revenues and profits, especially for those who have hedged their production at lower prices. According to Bloomberg, the US natural gas producers’ earnings are expected to increase by 62% in the second quarter of 2023 compared to the same period in 2020, while the US oil and gas drillers’ earnings are expected to increase by 440%.
However, the higher gas prices have also increased the cost of production and transportation for some producers, especially those who rely on spot market prices or face pipeline bottlenecks. According to Reuters, some US gas producers in the Permian Basin, Texas, have had to pay as much as $25 per MMBtu to move their gas to market due to pipeline congestion, while some Canadian gas producers in Alberta have had to pay as much as C$10 per gigajoule (GJ) to transport their gas to Ontario due to pipeline maintenance.
What Are the Outlook and Solutions for the Gas Price Hike?
The outlook for the gas price hike depends largely on the weather and the supply-demand balance. According to NOAA, the heat wave is expected to persist in some parts of the US and Canada until mid-August, while other regions may see cooler temperatures and more rainfall. This could moderate the demand for electricity and gas in some areas, but also reduce the hydroelectric generation in others.
According to the EIA, the US natural gas production is expected to increase slightly in August and September as more wells come online and maintenance outages end. The EIA also projected that the US natural gas storage would end the summer injection season (April-October) at 3.6 trillion cubic feet (Tcf), which is 6% lower than the five-year average but 16% higher than last year’s level. This could provide some cushion for the winter heating season, when gas demand typically peaks.
In Canada, the natural gas production is expected to remain stable or decline slightly in August and September due to wildfires and pipeline issues. However, Canada has ample storage capacity and can also import gas from the US if needed.
Some possible solutions for reducing the gas price hike include increasing energy efficiency, diversifying energy sources, expanding pipeline capacity, and promoting renewable energy. For example, consumers can use smart thermostats, LED bulbs, and energy-efficient appliances to reduce their electricity consumption and bills. Power plants can use coal, nuclear, hydroelectric, wind, solar, or battery storage to supplement their gas generation and reduce their exposure to price volatility. Pipeline operators can invest in new or existing pipelines to increase their throughput and reliability. Governments can provide incentives or regulations to encourage more renewable energy development and integration into the grid.