Economists, Energy Suppliers Ponder Natural Gas Crunch

Natural gas prices have risen dramatically — more than doubling in one year — and higher prices are likely to remain throughout the summer, reaching historic records next winter, Federal Reserve Chairman Alan Greenspan (search) said Tuesday.

"We are not apt to return to earlier periods of relative abundance and low prices anytime soon," Greenspan told the House Energy and Commerce Committee.

The average natural gas-fueled home uses about 80,000 cubic feet a year, according to the American Gas Association (search). Greenspan said markets are estimating that natural gas prices will likely cost $6 per 1,000 cubic feet next year, double the average price of natural gas last year. 

Adding insult to injury, the Federal Reserve chairman added that a 25 percent chance exists that prices could rise to $7.50 per 1,000 cubic feet next January, three times the average cost of natural gas just three years ago.

"An abnormally hot summer, followed by a cold winter could push natural gas deliverability to the limit and cause record high prices," Guy Caruso, head of the government's Energy Information Administration, told the hearing.

The age-old economics rule of supply and demand is responsible for the spike in gas prices, say experts. Industrial and consumer demand is rising, but natural gas supplies are not keeping pace. That's in part due to the fact that the United States does not have an unlimited supply and is not able to tap into foreign sources as easily as it does with oil.

"Rising demand for natural gas, especially as a clean-burning source of electric power, is pressing against a supply essentially restricted to North American production," said Greenspan.

At home, natural gas supplies from old wells are diminishing and permits to allow new domestic and offshore drilling have been slowed by environmental regulations. Stored gas supplies are now 28 percent below the five-year national average and 38 percent below what they were last year.

But environmental regulations are exactly what have driven up natural gas usage. As the cleanest burning fossil fuel, natural gas is the first source electricity providers turn to to generate enough power to handle peak demand and comply with Clean Air standards.

On top of that, while natural gas was previously used only in the winter for home heating, electricity providers now rely on it to keep air conditioners humming. That means the stores usually built up in summer no longer have time to replenish.

Experts say the supply shortage is likely to remain.

"It's a long-term proposition for commodities like natural gas to respond to price signals," said Melanie Kenderdine of the Gas Technology Institute. "It takes nine to 18 months to go out, explore, produce in response to very high price signals. So in the near term, we are going to face a supply crunch." 

The Senate is currently debating a new energy bill that seeks a pipeline to move Alaska's vast natural gas supplies to the mainland and provides royalty breaks for domestic and offshore natural gas drilling.

Experts say they energy bill could further help by giving industry greater access to gas reserves on federal lands.

Regulatory barriers to exploration and development should also be removed, said Richard Sharples, a vice president of Anadarko Petroleum Corp. (search)

But even with the changes, new supplies are years away.

The Energy Department has ordered an emergency summit on the subject for later this month. The government would like to see about 3.5 trillion cubic feet of gas in storage ready for the winter heating season. That's three times the amount available now and a real challenge since the government predicts a 2 percent decline in production compared with last year.

Following the advice of a group of Democratic lawmakers, Energy Secretary Spencer Abraham said he would like to look into conservation methods over the summer. Abraham has also asked the National Petroleum Council (search) to provide a game plan for dealing with the crunch.

In the meantime, energy suppliers say they are trying to prepare consumers for the sticker shock that is to come. Average residential heating bills in Ohio next winter will be $220 higher per household over last winter, said Donald Mason, head of the Ohio Public Utilities Commission (search).

Fox News' Major Garrett and The Associated Press contributed to this report.