By Jennifer Chen
Capital News Service
LANSING — Falling natural gas prices in Michigan might prompt drilling companies to cut production, according to the Michigan Oil and Gas Association.
Natural gas pump. Photo: juggernautco (Flickr)
A growing supply of natural gas in the state has weakened prices, putting pressure on drillers, said Frank Mortl, the association’s president.
With dropping prices, producers are hurting, but consumers are huge winners, he said.
Michigan ranked 13th among the states in natural gas production in 2006, according to Oil Gas Michigan.
“The only thing we can do is to reduce the output of natural gas,” said Leonard Harrand, president of Eagle Exploration Inc., a drilling company based in Traverse City, Mich.
“The warm winter made customers pay less for natural gas on their bill. Electric prices are kept lower since some electric plants run on natural gas,” said Judy Palnau, an information officer at the Michigan Department of Licensing and Regulatory Affairs.
In addition, Michigan State University economics professor Charles Ballard said new methods have been developed to extract natural gas from underground formations, increasing the supply of natural gas. That has pushed the prices downward.
“If some energy companies are reacting to the low prices by reducing their activities, that would be a sign that the price decreases may not continue,” Ballard said.
However, Mortl said that even if producers say the best way to reduce the low prices is to reduce output, it does not mean they would actually do so.
The mild winter decreased demand by more than the market anticipated.
However, Steven Miller, director of the Center for Economic Analysis at Michigan State University, said, “This alone would only generate a short-run glut as producers will curtail next year’s production to clear out the excess inventories.”
“As demand ramps up, we should see prices rise, but don’t expect that to happen within the next couple of years. It will take some time for demand to catch up with supply,” he said.
Profits for drilling companies have been hit hard, reducing state tax revenues, Miller said.
“However, this is such a small component of the state budget that it will hardly be felt. Consumers may open their wallets a little more with lower energy prices to increase purchases of goods and services that contribute to the state’s tax receipts,” Miller said.
Homes and businesses using natural gas would see their purchasing power increase with lower fuel bills– except for some products, such as automobile gasoline.
Ballard said, “Lower prices of natural gas make it cheaper to produce many things. For example, natural gas is used as fuel for refining petroleum into gasoline. With cheaper natural gas prices, U.S. refineries have been exporting gasoline to other countries, contributing to the higher gas prices.”