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Businesses reap rewards of declining gas prices

| Saturday, Feb. 27, 2016, 9:00 p.m.
Philip G. Pavely | Tribune-Review
Nina Zolotova works amongst loaves of cinnamon swirl bread in the finishing department at 5 Generation Bakers in McKees Rocks, Thursday, Feb. 11, 2016.
Philip G. Pavely | Tribune-Review
Scott Baker, of 5 Generation Bakers, shows off their soon-to-be new location in McKees RocksThursday, Feb. 11, 2016.
Philip G. Pavely | Tribune-Review
Loaves of cinnamon swirl bread are weighed before thay are baked at 5 Generation Bakers in McKees Rocks, Thursday, Feb. 11, 2016.

It costs less to turn on the ovens at 5 Generation Bakers, allowing owner Scott Baker to do more with them.

The McKees Rocks company, which makes frozen breads under the Jenny Lee brand name, saw its natural gas costs decline 4.5 percent to $21,400 in 2015 from the previous year.

“That decline is pretty significant given that production is up 10 percent,” said Baker, who added another shift to the 38-employee company last year.

As natural gas costs hit multi-year lows nationwide because of increased production, mild weather and tepid demand, businesses and other large users stand to reap the biggest benefits. Commercial customers in the Pittsburgh region expect their long-term savings to be more significant than what they're seeing now, especially for small businesses, offsetting other rising business costs.

The average U.S. natural gas spot price for 2015 was $2.61 per million British thermal unit, the lowest since 1999, according to the Energy Information Administration.

Consumers are benefiting from home energy bills but aren't necessarily seeing companies' savings passed along as businesses reinvest. It will take time before customers encounter bigger natural gas cost reductions as lower retail prices often lag behind falling wholesale prices, said Katie Teller, an economist with the EIA.

Still, some large natural gas users are getting more for less.

The 14 universities that are part of Pennsylvania's State System of Higher Education paid $11.2 million for 1.8 million in thousand cubic feet of natural gas in 2015, compared to $12.9 million spent for 1.4 million in thousand cubic feet in 2010, said Kenn Marshall, spokesman.

Two main factors are at play: the lower price of natural gas and more joint purchasing agreements among universities that save money by buying fuel in partnerships, Marshall said.

The universities need every dollar they can save, since their state appropriation was cut by $90 million, or almost 20 percent, in 2010-11, he said.

“We're getting the same dollars today that we did in 1997. That's not adjusted for inflation,” he said.

‘The price kind of fell out'

In the United States, about a third of natural gas goes to residential and commercial uses such as heating and cooking, one-third to industrial uses and one-third to electric power production, according to the Department of Energy.

Record production and mild weather have been driving down prices.

“The price kind of fell out a few years ago as the shale boom really took hold,” said Rob Applegate, manager of energy analysis for PointLogic Energy, a research firm based in Gaithersburg, Md.

In the Northeast, residential spending on natural gas in winter 2015-16 is projected to be $752, which is 18.2 percent less than in the previous winter season, according to the EIA.

In Pennsylvania, commercial customers spent $8.27 per 1,000 cubic feet for natural gas in November, compared to $9.38 in November 2014 and $9.63 in November 2013, the most recent EIA data show. Industrial customers spent $9.10 per 1,000 cubic feet in November, compared to $9.16 in November 2014 and $9.29 in November 2013.

Even small cost reductions can make a big impact, business owners said.

North Side-based Priory Hospitality Group's natural gas costs for its banquet facility and adjacent hotel in 2015 were $24,779, which is 15.5 percent less than in 2014, said CEO John Graf. At its bakery, Priory Fine Pastries, natural gas costs dropped 30 percent from the year before, to $5,100 in 2015.

Such savings can make a difference for a business with 70 employees, Graf said.

“For us, it helps with cash flow. In terms of raw numbers, it wasn't enough to set aside for some kind of capital investment,” Graf said.

Staying the course

Despite the low prices, most users won't be switching from other energy sources to natural gas in the short run, Teller said.

“Most businesses can't really change their heating source or cooking fuel quickly — it's very costly and time-consuming to convert a heating source to natural gas from heating oil (for example). This year and next year, we're projecting increases in the commercial sector consumption, but that's because of colder temperatures in 2016 and 2017 than in 2015,” she said.

Such demand for natural gas generally is affected by weather, not price, but price is spurring more power companies to switch from coal to natural gas as a source for electricity generation, Applegate said.

Last year, natural gas overtook coal as the top source for electricity generation in the United States and Pennsylvania during several months. In the third quarter, 18.1 million megawatt hours of electricity were produced from natural gas, compared to 17.5 million megawatt hours from coal.

Tory N. Parrish is a Tribune-Review staff writer. Reach her at 412-380-5662 or tparrish@tribweb.com.

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