Natural Gas Prices at Their Highest Level Since 2022

Answer the following questions to check your understanding of the story.

1) What type of good is natural gas?

Natural gas is a ___________.

a) renewable natural resource

b) nonrenewable natural resource

c) capital good

d) factor of production but not a consumer good

Wrong! - Natural gas doesn’t replenish naturally, so it is not renewable. Capital goods are produced; natural gas is not. It is used by firms in production and consumed directly by households.

Correct! - Natural gas is a natural resource because it is a gift of nature. It can be used only once and does not replenish naturally.

2) As extremely cold temperatures are forecast in the United States, how has the market for natural gas changed?

The expected future price of natural gas has ___________ today because ____________.

a) fallen; both demand and supply are expected to increase

b) fallen; both demand and supply are expected to decrease

c) risen; demand is expected to decrease and supply is expected to increase

d) risen; because demand is expected to increase and supply is expected to decrease

Wrong! - Lower expected demand and higher expected supply cannot raise the expected future price. Pipeline disruptions decrease supply, not increase it. Cold temperatures increases, not decreases, the demand for natural gas for heating.

That's Right! - As cold temperatures are forecast, demand for heating is expected to increase, while supply is expected to decrease due to pipeline disruptions, raising the expected future price.

3) Why have the natural gas prices risen to the highest levels since 2022?

Natural gas _____________, so these ______________.

a) can be stored by households; households have increased demand today in anticipation of a future surplus

b) cannot be stored by firms that produce it; these firms have increased supply today

c) can be stored by firms that produce it; these firms have decreased supply today in anticipation of future shortages

d) can be stored by firms that use it as an input; firms have increased demand today in anticipation of future shortages

Wrong! - Households cannot store natural gas, and a future surplus contradicts the higher expected future price. If producers were storing gas, storage levels would not be decreasing. Firms have storage facilities, and higher prices cannot be explained by an increase in supply.

Well Done! - For a storable good, expected future shortages and the resulting rise in the expected future price increase current demand and raise the current price. Firms with storage capacity buy natural gas today to avoid future shortages.

Share this: