| Increases in natural gas prices per thousand cubic feet | |||
| 2000 | 2005 | Increase | |
| Wellhead | $3.68 | $7.51 | 104.10% |
| Imports | $3.95 | $8.41 | 112.90% |
| City Gate | $4.62 | $8.64 | 87% |
| Industrial | $4.45 | $8.49 | 90.80% |
| Electric Power | $4.38 | $8.45 | 92.90% |
| Commercial | $6.59 | $11.56 | 75.40% |
| Residential | $7.76 | $12.81 | 65.10% |
| Source: Energy Information Agency, Department of Energy, July 2006, taken from the Sonecon report | |||
A report by Robert Shapiro, chairman of economics consultancy Sonecon and Nam Pham shows there are flaws in the pricing of the natural gas index that allow for manipulation. “Federal regulators have documented a series of practices by companies and traders resulting in price manipulations,” says the report. The most classic form involves simultaneous buying in futures and spot markets. “A manipulator acquires a large futures position and then goes into the current or near-term market to buy enough natural gas to push up the price. The increase in the current or near-term price of natural gas raises the price of futures contracts, which can then be sold at a profit without driving the price back down,” says Shapiro.
While this is not illegal, there are means of manipulating the price of natural gas to ensure that when the trader has to sell off its current or near-term holdings, he or she can ensure that the price is not driven down. Flaws in pricing methods can allow traders to misreport gas prices and keep the price up.
Unverified reports
“Some of these practices take advantage of procedures adopted by the industry to collect and disseminate price information, using indices created and published by the reporting companies. Under these procedures, trading prices for natural gas are collected from traders through informal surveys conducted by reporting firms. However, traders are not obligated to participate, information on daily trading volumes are not collected, and the reports are not verified except by comparing them to other reports.”
It is therefore possible to report false information that can be used to drive up prices. A trader could, for example, enter into a contract requiring physical delivery of the natural gas at an index price. These index prices are published on the first of each month based on pricing information provided by traders in the previous month’s surveys. “By reporting false information to the industry publication, traders can push the industry index prices up or down, and thereby affect the price of natural gas,” says the report. “Documenting the precise impact of such activities on natural gas prices requires further investigation,” says Shapiro, but he is certain economic fundamentals are not responsible for the sharp increase in natural gas prices since 2000.
