What are the “Structural Changes” in U.S. Natural Gas Demand?

Last week, we covered the current state of natural gas stocks, which are at their lowest level in 11 years. While plenty of blame goes to surging residential heating demand during the harsh winter, much focus has also been on the changes in how natural gas is used in the United States economy and the impact that these changes are having on demand. Brad Evans, vice president and senior portfolio manager of Heartland Funds, reiterated this in the Wall Street Journal, saying "The perception is that we have all this natural gas and it will be cheap forever. Supply has grown, yes, but demand has grown in lock step with it." In the Financial Times, Teri Viswanath, gas analyst at BNP Paribas, was more specific, saying that “structural changes” in power generation and increased use of natural gas for both industrial power and as a feedstock for the chemicals industry is permanently altering the landscape. EIA’s data show steady demand increases in the power generation and industrial use sectors. Power generation is no secret. Overall, natural gas demand has increased 16.2 percent from 2004 to 2013, but EIA’s data show that natural gas consumption for power generation increased 49 percent over the same period (and 22 percent since 2008). Residential and commercial demand have remained roughly flat on an annual basis, although they fluctuate from year to year depending on the weather or severity of winter. However, industrial natural gas demand is another matter. While overall industrial demand has risen only marginally—by less than ten percent in the past decade—demand from specific industrial sectors has surged. Natural gas used in well, field, and lease operations (to power drills, heaters, dehydrators, and field compressors) and processing plants has increased massively. All told, the oil industry’s demand for natural gas has surged along with the domestic oil production boom, rising 30 percent during that period. Natural gas demand for transportation has seen steady relative gains, but remains an extremely low share of overall demand. Most of the natural gas used in the “transportation” sector is not powering vehicles or mobility, but pipelines. While the amount of natural gas used as a vehicle fuel has increased 57 percent in the past decade, it will only account for 1.2 percent of total natural gas demand in 2013. It’s also worth noting how dramatically natural gas use swings between seasons. In winter, total U.S. natural gas demand is nearly one-third higher than in summer, driven by heating demand in the residential and commercial sectors. However, some of the summer loss is offset by increased demand to power air conditioning and other summer energy users.