ICF Consulting Recommends a Solution to Help Home Heating Bills: Lower Natural Gas Prices by Lowering Oil Prices

FAIRFAX, VA, September 27, 2000 - The recent attention being given to high prices for home heating oil overlooks the fact that natural gas is the principal fuel used to heat homes in the United States. Today, more than 60 million U.S. homes heat with natural gas—more than six times the number that use heating oil. In the past year, natural gas prices doubled to record levels.

North American Natural Gas System (NANGAS®)

Given the widespread use of natural gas for home heating, these record prices will present a financial burden to more Americans this winter than will high, heating-oil prices. Customers that heat their homes with natural gas could see heating bills that are 50 percent or more higher than last year.

Lower Oil Prices Mean Lower Natural Gas Prices

ICF Consulting strongly believes that natural gas prices could drop significantly if oil prices decline. As a result, the increase in this winter's home heating bills for homes heating with natural gas would be less extreme.

Many observers have incorrectly blamed high natural gas prices on low natural gas supply deliverability, growth in natural gas demand in the power sector, and low levels of injection of natural gas into storage. ICF Consulting's analyses of market dynamics conclude that the recent increase in natural gas prices is primarily a result of high oil prices. Therefore, any successful efforts to reduce petroleum prices would also have the beneficial effect of lowering natural gas prices.

Greater Use of the Strategic Petroleum Reserve

President Clinton announced Friday his authorization to release up to 30 million barrels of crude oil from the nation's Strategic Petroleum Reserve (SPR). This amounts to only about 0.5 million barrels a day when daily U.S. demand is about 20 million barrels per day. ICF Consulting questions the likely impact of this relatively small release of crude oil to the market. Significantly stronger measures are necessary if the intent is to dramatically lower oil prices. One possible solution is to utilize more of the SPR, since it has the capability to deliver about 4 million barrels per day for 90 days and still keep sufficient reserves in the ground for emergency purposes. However, such an action requires Congressional authorization and is beyond the authority of the President alone to implement. Alternatively, if OPEC (or Saudi Arabia independently) provides a substantial amount of incremental oil supply to the market, the result would be the same.

It would take somewhere in the range of 2 to 3 million barrels a day for a month or more to reduce crude oil prices from current levels of more than $30 per barrel to a more stable level of $20 to $25 per barrel. Then, natural gas prices would only be about 20 percent higher than last year for homes heating with gas.

Economic Connection Between Natural Gas and Oil Prices

Conventional wisdom says that, today, oil prices have little influence on gas prices. ICF Consulting has used its proprietary North American Natural Gas Analysis System (NANGAS®)—the most detailed model of the North American natural gas industry ever developed—to determine that this "decoupling" appears not to be currently true. Oil and gas prices decouple when excess gas supply exists and oil prices are low. In that scenario, the gas market is driven by gas-on-gas competition, with gas prices at the burnertip below parity with petroleum prices. Today, the situation is the opposite; oil prices are high and gas supplies are tight. As a result, oil and gas prices at the burnertip are near parity and have again become coupled. Observers under-emphasize the degree to which prices are set on the margin. Even slightly increased demand for gas resulting from users switching from oil to natural gas raises natural gas prices.

ICF International (Nasdaq: ICFI) partners with government and commercial clients to deliver consulting services and technology solutions in the energy, environment, transportation, social programs, defense, and homeland security markets. The firm combines passion for its work with industry expertise and innovative analytics to produce compelling results throughout the entire program life cycle, from analysis and design through implementation and improvement. Since 1969, ICF has been serving government at all levels, major corporations, and multilateral institutions. More than 1,800 employees serve these clients worldwide. ICF’s Web site is http://www.icfi.com.

For Immediate Release Contact: Douglas Beck 1.703.934.3820