Importance of PPI Indexes in Understanding Natural Gas Prices

The Importance of PPI Indexes in Understanding Natural Gas Price Variations
Student’s Name
Institutional Affiliation

The Importance of PPI Indexes in Understanding Natural Gas Price Variations
Similar products and services are provided to customers at different prices, depending on the region. In most cases, the cost of a commodity tends to be lower in the place where it is produced. However, as the product is moved to a different location, the price usually increases. Economists use the producer price index (PPI) to measure how the costs of domestic commodities change in distinct regions. Some of the things that cause the price of a commodity to vary in different places include the infrastructure, demand, supply, weather patterns, and seasons. For example, some products such as those used for decorations are in high demand in December since many people are celebrating Christmas all over the world. For this reason, their prices increase. When it comes to natural gas, the price fluctuation is also affected by the above factors, particularly in the United States of America (USA). The paper focuses on how the natural gas prices in the USA is influenced by pipeline access, demand and supply, production, weather patterns, and the presence of storage facilities.
Natural gas consumers in different regions in the USA do have the same experience in the price fluctuations. The regional variations in the production, consumption, weather patterns, pipeline infrastructure, and storage facilities significantly affect the cost of natural gas. In reality, the cost of heating a house in Massachusetts is different from the one in Louisiana. The Bureau of Labor Statistics (BLS) came up with the PPI, which can be used to analyze changes in the natural gas market. From 2005-2016, the USA production of natural gas rose by about 50%, which made the country the largest producer of this product in the world. Henry Hub gas prices reduced from $8.69 to $2.52 per million British Thermal Units (BTU) from 2005 to 2016 (York, 2018). The presence of pipeline infrastructure makes it possible for producers to supply the commodity to consumers. On the contrary, the lack of pipelines is a primary constraint in moving natural gas from one region to another, which is one of the factors that cause regional price differences. For example, the price of natural gas in the Middle Atlantic region has always been lower due to increased production. From 2008 to 2016, the production rose from 200,000 to 5,200,000 million cubic feet (MCF), which was a 2,500% increment (York, 2018). For this reason, residents of Pennsylvania get natural gas at a low price. The other factor that makes the cost of this product to remain low is the lack of pipeline infrastructure in the region. As such, natural gas is oversupplied in the Middle Atlantic.
The demand and supply of a particular product are what determines its price. When the demand for commodities increases, and the supply reduces, the cost of such goods is likely to rise. For example, New England’s production of natural gas is opposite to that of the Middle Atlantic. In other words, the production of natural gas in this region is low, and the supply to other places is high. Besides, New England has a pip...