Natural Gas Prices Are Rising
This paper is going to contain an analysis about articles pertaining to a current event related to the market in which my organization operates. According to the book Macroeconomics, by David Colander, economics is defined as the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society. This paper will also include an example of supply and Demand related to this topic, and discuss the difference between movement along and shift of the demand curve. In addition, the role of government will be discussed as well. The articles I have chosen are entitled, "Natural gas prices rising" by Lisa Hayes who is staff writer at Petoskey Newspaper, and an article retrieved from DTE Energy's intranet website entitled "Rising Natural Gas Costs".
I am employed at DTE Energy, which is an energy provider for over 2.1 million electric customers and 1.2 million gas customers for Southeastern Michigan. The current event related to this organization is the rising of natural gas prices. Natural gas prices are rising because the demand is up, which means that prices go up. DTE projected gas prices to rise this winter, and then remain steady throughout the spring and summer. However, one factor contributing to the price increase is low natural gas reserves which are the result of the long cold winter, past the significantly depleted underground storage stockpiles, meaning more gas now needs to be bought to compensate. This is definitely a supply and demand issue (Hayes, L).
The price of natural gas is a National issue, not just a Michigan issue. This is an issue for all utilities throughout the country as they are dependent on natural gas as well. Natural gas is a commodity that is traded on the open market, just like stocks, soybeans and coffee beans. As a result, the price is subject to the laws of supply and demand. After a steady increase over the past 12 to 18 months have moderated somewhat as a cooler than normal summer in 2003 dampened demand for gas-generated electricity and allowed natural gas storage fields to be replenished to meet heating season demands (DTE Energy). Nationwide and abroad, gas production has not kept up with demand. For example, demand for natural gas during the bitter winter of 2002 reduced storage reserves to its lowest level since 1976. Natural gas has increased because the majority of the new power plants are now fueled by natural gas. Because the supply of natural gas has not kept up with the demand, natural market forces have driven prices up over the past year (DTE Energy).
The law of demand states that the quantity demanded of a good is inversely related to the price of that good, other things constant. As the price of a good goes up, the quantity demanded goes down, so the demand curve is downward sloping (Colander, D). The demand for natural gas is up which means that DTE will need to increase gas prices.
However, since the inception of deregulation for energy, consumers and businesses have a choice of purchasing energy from other competitors. This change will have an effect on the movement along the demand curve. A movement along a demand curve is defined by David Colander as the graphical representation of the effect of a change in price on the quantity demanded. Because customers have a choice to buy energy from other alternative suppliers, the demand for electric and gas will decrease causing a curve. Conversely a shift demand refers to the effect of anything other than price on demand. A factor that contributes to shift demand is the prices of other goods in this real world scenario. The fact that DTE is competing with other utilities is the cause of a shift demand factor. Thus, that is why these three words "other things constant" are included in the definition of the law of demand because it places a limitation on the application of law and demand meaning other factors could cause a change in the demand curve (Colander, D.).
The government plays a role in controlling the cost of energy by setting the rules between businesses and customers. Twenty years ago, the Michigan legislature created the Gas Recovery Cost (GCR) process to protect consumers and enable utilities to recover gas costs. The Michigan Public Service Commission (MPSC) reviews DTE Energy's GCR plan on an annual basis. The price DTE Energy pays to acquire natural gas supply is directly passed on to customers. DTE Energy does not make a profit on the cost of natural gas. Although DTE Energy's natural gas costs have increased, the price a consumer pays for gas is still lower than what other utility customers pay in many surrounding states (DTE Energy).
In 2004, DTE Energy has proposed reducing the GCR rate from the current price of $5.75 per thousand cubic feet (MCF) of natural gas to $5.36 cents per MCF, which would be a decrease of 7 percent. The proposed GVR of $5.36 is a projection of what DTE Energy expects the market price of natural gas to be in 2004. By making the necessary purchases throughout the year, DTE Energy maintains an adequate supply of gas to last through the cold winter months, and keeps prices for its 1.2 million gas customers as low as possible (DTE Energy).
