The supply side of the natural gas market has been a relatively bright spot in the U.S. energy picture in recent years. These estimates, viewed in conjunction with recently declining prices, suggest that there is little impediment to increasing consumption of natural gas from the supply side of the market, making the decline in industrial demand harder to explain. The nitrogen-based fertilizer industry is examined as an example of a major natural gas consuming industry that has been affected by high and/or fluctuating prices. The yearly deviation from average demand over the decade generally has been less than 4%. These data suggest that the effects of lower gas prices coupled with reduced effects of the recession were increasing demand. Imports continued to decline in the first 10 months of 2010 as lower-cost domestic production continued to expand its market share. A number of factors likely contributed to the decline in industrial natural gas demand in any particular application. Structural Factors Affecting Industrial Demand

Because the industrial demand for natural gas is spread across many industries, utilizing natural gas in a wide variety of processes, not every factor analyzed in this section of the report will be applicable to every industry equally, or in the same way. This factor would tend to decrease the U.S. industrial demand for natural gas. Natural Gas Prices

The data in Table 4 show that the 2000s were generally characterized by high industrial prices for natural gas, peaking in 2008, and moderating in 2009 and 2010. In terms of the production process of the industrial consumer, if there are no substitutes for natural gas, or if natural gas is a small portion of the total cost of production, the effects of higher natural gas prices on industrial demand might be relatively small. Whether the domestic fertilizer industry will rebound to former production levels as a result of the apparent increase in domestic natural gas supplies and potentially reduced and more stable prices is likely to depend on the interaction of a variety of factors. The industrial demand for natural gas sector has experienced decline and consolidation.
The U.S. industrial demand for natural gas has been the largest of the five demand sectors identified by the Energy Information Administration (EIA). It also has been the only sector that has exhibited a decline in its total consumption over the decade of the 2000s. Some have attributed this decline in demand to high, fluctuating natural gas prices.
Rising natural gas prices in the 2000s were related to expectations of increased demand coupled with an apparently scarce resource base and declining production. In recent years, the perception of increasing scarcity and the need to open the market to larger volumes of imports has been replaced with estimates of increasing domestic production from a resource base that might provide supply for a hundred years at current consumption rates. The tangible market result of these changing perceptions and economic conditions has been lower natural gas prices in 2009 and 2010.
The industrial demand for natural gas ranges from use as a feedstock in the nitrogen-based fertilizer industry to re-injection in oil wells to enhance production. The ways natural gas is used, the substitutes that are available, and the importance of gas in the cost structure of the industry vary widely. As a result, many factors potentially could contribute to the decline in demand.
The factors identified in this report as contributing to the decline in industrial sector natural gas demand include, in addition to price behavior, the recession, industrial consolidation, electricity substitution, technological improvements, and environmental regulations. These factors are likely to affect different consuming industries to varying degrees, depending on economic conditions.
The nitrogen fertilizer industry is an example of how the dynamics of natural gas prices in conjunction with the other identified factors contributed to decreased demand. While high natural gas prices and a number of other factors caused imports to expand their market share, it is uncertain whether the industry will recover domestically as a result of lower gas prices.