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Tuesday, February 15, 2011

Industrial Demand and the Changing Natural Gas Market

Robert Pirog
Specialist in Energy Economics

The U.S. industrial demand for natural gas has been the largest of the five demand sectors identified by the Energy Information Administration (EIA). It also has been the only sector that has exhibited a decline in its total consumption over the decade of the 2000s. Some have attributed this decline in demand to high, fluctuating natural gas prices.

Rising natural gas prices in the 2000s were related to expectations of increased demand coupled with an apparently scarce resource base and declining production. In recent years, the perception of increasing scarcity and the need to open the market to larger volumes of imports has been replaced with estimates of increasing domestic production from a resource base that might provide supply for a hundred years at current consumption rates. The tangible market result of these changing perceptions and economic conditions has been lower natural gas prices in 2009 and 2010.

The industrial demand for natural gas ranges from use as a feedstock in the nitrogen-based fertilizer industry to re-injection in oil wells to enhance production. The ways natural gas is used, the substitutes that are available, and the importance of gas in the cost structure of the industry vary widely. As a result, many factors potentially could contribute to the decline in demand.

The factors identified in this report as contributing to the decline in industrial sector natural gas demand include, in addition to price behavior, the recession, industrial consolidation, electricity substitution, technological improvements, and environmental regulations. These factors are likely to affect different consuming industries to varying degrees, depending on economic conditions.

The nitrogen fertilizer industry is an example of how the dynamics of natural gas prices in conjunction with the other identified factors contributed to decreased demand. While high natural gas prices and a number of other factors caused imports to expand their market share, it is uncertain whether the industry will recover domestically as a result of lower gas prices.

Date of Report: February 10, 2011
Number of Pages: 13
Order Number: R41628
Price: $29.95

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