The high cost of heat: often described in the recent past as an inexpensive fuel option, natural gas is seeing its costs shoot up as supply is temporarily strained.(OIL)(Cover story)

For those living in the northern states, the cost of heating this year is expected to be considerably higher than in previous years. For users of natural gas, the most commonly used fuel for heat, the extra burden will be excessive. The Energy Information Agency has predicted that the cost of natural gas will increase by as much as 71 percent this winter in the Midwest, with a smaller, but still substantial, increase expected in the Northeast, another bastion of heavy natural gas use. Moreover, the expected increases in the costs of heating are not confined to natural gas. The cost of heating oil is also expected to rise, though not necessarily to the same degree as natural gas.

For users of heating oil, a fuel refined from crude oil, the increased costs stem from the same factors that are increasing the cost of gasoline and diesel at the pumps. Natural gas, touted just a few years ago as an abundant and cheap alternative fuel for heat, is seeing its price rise for other reasons. A large component of the price increase predicted for natural gas this winter is due to the disruption in supply caused by Katrina. According to Jonathan Cogan, a specialist with the Energy Information Agency, the price of natural gas has spiked because "offshore Gulf of Mexico accounts for one-fifth of all natural gas produced nationally, and 35 percent of that is still shut in. Getting that production back on line is crucial to improving the supply and demand situation." In addition, electric utilities are more dependent on gas for electricity generation than in the past. This summer's hot weather caused an upsurge in demand for electricity that caused utilities themselves to use more gas, leaving supplies tight as the heating season approaches. "Hot summers divert gas from storage, which you need plentiful storage volumes of to keep supplies sufficient," Kevin Shannon, president of Open Flow Gas Supply Co., told The Derrick of Oil City, Pennsylvania.

An additional reason for the increasing price of natural gas over the last few years is the lack of new production capacity. A decade ago, natural gas was cheap and plentiful and ...