New Concerns Raised About Manipulation of Natural Gas Prices

In recent years, prices for natural gas have risen steeply. The usual explanation given is that it is due to market forces, the natural consequence of supply and demand.

A few months ago, several midwestern state attorney generals issued a report on natural gas markets authored by economist Mark Cooper, Ph.D. Cooper frequently authors reports for the Consumer Federation of America. Their report concluded that pricing of natural gas is not being driven by fundamentals of supply and demand. Instead, the major price increases may be due in significant part to the trading activities of hedge funds or other speculators, or possible market manipulation.

A report on natural gas markets issued in August 2006 authored by economists for the conservative National Legal and Policy Center reaches similar conclusions, stating:

"high natural gas prices of the past five years, and current prices for natural gas futures likely reflect other factors, including the structure of the market, speculation not based on economic fundamentals and perhaps price manipulation. . . .

These distortions impose costs of many billions of dollars for the millions of Americans businesses and tens of millions of American households that depend on natural gas for heating and on utilities that use natural gas to produce electricity for air conditioning and other uses. . . . . Thorough investigations by the Congress and federal regulatory bodies may establish whether speculation and market manipulation contribute to the dramatic divergence of natural gas spot and future prices from their underlying economic fundamentals."

Major traders in natural gas markets have paid billions in fines in recent years to settle allegations that they manipulated prices.

Ripple Effect of Natural Gas Price Manipulation on Electricity Markets
Artificially increased prices for natural gas can have a leveraging effect on electricity prices in states like New York that "restructured" their electricity industries. Today, instead of operating a fleet of diversely fueled power plants and buying fuel in advance for them, New York utilities must buy electricity for their customers in weakly regulated spot markets where electricity is bought just one day or even one hour ahead of its use. The market clearing prices are volatile, and are paid to all sellers.

Electricity spot market prices are often based on the price demanded for natural gas fired generators. Their price demands incorporate natural gas spot market prices. As a result, a manipulated natural gas price could increase significantly not only the price paid for electricity generated from gas-fired generators, but also the price for electricity from all other sources, including generation sources that do not burn natural gas, such as hydro, nuclear, and coal.

For more information see PULP's web page on national utility energy issues.