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(Sergiy Tryapitsyn)
(Sergiy Tryapitsyn)

Rob Carrick

It's time to lock in a natural gas price Add to ...

The same events that have rocked the financial world are also presenting opportunities for us to exert some control over the cost of living.

Natural gas prices are a good example. They’ve hit 10-year lows recently thanks mainly to a combination of new production coming on stream, a warm winter and a decline in demand related to global economic weakness. Unless you think we’re headed toward a lengthy recession that will keep the price of commodities low indefinitely, now’s a good time to lock in a natural gas price for the next five years at a very attractive rate.

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Think of a fixed-rate natural gas supply contract like the 10-year mortgages I wrote about last week. You may not get the absolute best price or rate possible, but you do lock in a cost that looks excellent by historical standards. Just as important, you add some cost certainty to your life.

One of the most disturbing things about the past few years is how vulnerable we’ve all become to financial events that are far removed from our everyday existence. The developments themselves are shocking, but so is the feeling of having no control over our lives.

Locked-in gas contracts and long-term mortgages give back some control. They bring some welcome predictability to your monthly expenses, and that might just help you find room in your budget to lock in or ramp up a regular savings regimen.

The last time there was much buzz about locking in a price on natural gas was in 2005, just after Hurricane Katrina struck the southern United States and shut down a significant amount of natural gas production. There were estimates from around then that natural gas prices could surge as much as 71 per cent, and that had some people thinking about locking in to protect themselves.

This bit of history highlights one of the key rules about locking in costs or interest rates. You only do it at a low point, never as a reaction to prices that have already surged. Following the 2005 price surge, natural gas was undercut by falling demand and rising supply from shale gas deposits in the United States.

The down side of locking in a natural gas price now is that you immediately increase your monthly gas bill. “The idea of locking is not to save in the first year – you can virtually never do that,” said Ian MacLellan, vice-president of marketing at Energyshop a source of information for consumers and business on energy prices. “Really, the idea of locking into a long-term gas contract is to save in the third, fourth and fifth years.”

Mr. MacLellan said that Enbridge and Union Gas, major gas suppliers in Ontario, have a current gas supply charge of 12 cents per cubic metre. That compares to a peak price around 42 cents and a long period around 35 cents that ended when the financial crisis hit.

According to the Energyshop website, the cheapest price that someone in Ottawa, where I live, can lock into for the next five years is 19.7 cents, a premium of about 64 per cent. However, the gas supply charge accounts for only about half of a heating bill. Mr. MacLellan said the other half is represented by storage and distribution costs, which tend to rise annually by the rate of inflation. Bottom line, an Ottawa resident’s gas bill would go up by about one-third immediately in order to limit annual increases over the next five years to well below the inflation rate.

No question, it’s possible for gas prices to move lower from the current level around $2.32 (U.S.) per million British thermal units. Looking at natural gas as an investment, one blogger recently called it “the widow maker” because of the potential for losses this year.

If you’re of a mind to lock in, don’t hold off until gas prices start to rise. “If you wait to lock in until then, the long-term prices will already have gone up,” Mr. MacLellan said.

Compare lock-in rates for natural gas on the Energyshop website or by Googling “natural gas contracts.” Prices vary by a surprising degree, which raises the question of whether there’s any risk in going with the lowest-cost firm.

“There’s no risk in signing up with the lowest cost provider, even if you haven’t heard of them,” Mr. MacLellan said. He argues that if your supplier goes bankrupt, its contracts would be bought by a competitor.

Mr. MacLellan speculated that people may end up paying higher prices to lock in because they get caught up in sales pitches made by door-to-door salespeople. Before committing to any such contract, always shop the market to get comparative prices.

_______

Personal finance columnist Rob Carrick looks at his options for locking in the natural gas supply cost for his Ottawa home. Commodity prices in cents per cubic metre.

Supplier

1 Yr. Fixed

2 Yr. Fixed

3 Yr. Fixed

5 Yr. Fixed

MyRate Energy

14.7

16.7

17.7

19.7

Superior Energy

14.9

--

17.9

19.9

RiteRate

--

--

18.3

19.8

Active Energy

16.9

--

--

--

Direct Energy

--

--

--

25.9

Just Energy

--

--

19.9

21.9

Source: EnergyShop.com

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For more personal finance coverage, follow me on Twitter (rcarrick) and Facebook (Rob Carrick).

Follow on Twitter: @rcarrick

 

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