How exactly does the transportation of natural gas impact energy prices?
One factor that needs to be understood whenever looking at market pricing trends is supply and demand. Factors that may drive supply include increases in production and expansion of drilling, while demand factors are weather, development, and so on. However, one factor that isn’t talked about nearly as much as it ought to be is transportation. What we’re referring to is the movement of natural gas along inter- or intrastate pipelines, from where natural gas is produced to where it’s actually used. How exactly does the transportation of natural gas impact energy prices? Let’s take a look.
Maximum Capacity Pipes
Every pipeline that carries natural gas also has a finite capacity in terms of what it can carry at a given time, regardless of supply and demand factors. Typically, we think more supply than demand will lead to lower prices—but if the pipelines are already at max capacity, your supply doesn’t matter much. You physically cannot deliver any more gas during that time because the pipe won’t fit any more.
Different Markets, Multiple Pipes
Aside from the capacity of a single pipe, there’s also the number of total pipelines that are available. Some regions are serviced by multiple pipelines, which can create a level of optionality in how shippers plan to distribute natural gas.
These options may make it easier for shippers to manage their transportation costs and schedules. Think of it this way: if you’re stuck in traffic due to roadwork, there may be a detour you can take to get to the same place—but some areas may only have one road that leads to that destination, similar to how some areas may only have one pipeline.
Pipelines Not Flowing
Operational Flow Orders (OFOs) are sometimes used by pipelines to protect the system’s integrity at a given time. Pipelines or utilities may deploy an OFO in the case that there’s a cold winter, letting both shippers and customers know that there’s a limitation on the amount of physical gas they can use in order to prevent damage to the system. This can also happen during scorching hot summers.
Safety always comes first, and reliability is a close second. Shippers and customers getting outside of guidelines set with an OFO may be subject to cost penalties.
Changing Tariffs and Regulations
Just like how some roads have tolls, shippers usually have to pay to occupy the space on a pipeline as well as the natural gas itself. We’ve seen all kinds of updates to tariffs over the past few years which can impact energy prices and supply. Sometimes the cost to move the gas itself is subject to change.
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