Natural gas squeeze starts to pinch

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Natural gas squeeze starts to pinch By John W. Schoen MSNBC Dec. 20 — There are some hopeful signs on the energy front: oil prices are down sharply as increased production from the Organization of Petroleum Exporting Countries finally kicks in and replenishes record low inventories. Now here’s the bad news. Despite a flurry of new drilling, tight supplies of natural gas continue to push prices to record highs through this winter. And don’t look to OPEC to make up that shortfall; it’ll be at least a year before gas supplies catch up with booming demand. THE NATURAL GAS crunch has been building for years, as low prices two years ago forced oil and gas producers to cut back on drilling new wells. Even as a booming U.S. economy increased demand for energy, and oil prices rebounded, natural gas production fell by some 6 to 7 percent a year for the past three years, according to Lehman Brothers energy analyst Thomas Driscoll. “We got through the past couple of winters without people noticing how much production came down because we had unusually warm weather,” he said. “Now that we have a normal winter again we have real heating demand out there.” Advertisement

That “normal” winter demand has drawn U.S. natural gas reserves to an all-time low as the new year begins, according to a recent report by Cambridge Energy Associates. The report predicts reserves of 1,850 trillion cubic feet in January, more than 650 billion cubic feet below where levels stood a year earlier.

And that’s sent natural gas prices through the roof, with natural gas prices on the futures markets hitting $9.86 per million British thermal units last week. Spot prices have shot up to much as $50 per btu, according to Driscoll. Consumers getting their first big heating bills are also feeling the pinch. The Energy Information Administration warned consumers to expect heating oil bills that will average about $1,044, up from $760 last winter. If you use natural gas, your bill gas is expected to jump to $834 on average this winter, compared to $540 last year. Businesses are feeling the heat too. Some heavy natural gas users, like chemical companies, have decided they can make more money by shutting their plants and selling off natural gas supplies that they bought at lower prices on the futures markets.

That slowdown could help cut demand. Higher energy costs are already getting part of the blame for the U.S. economy’s rapid cooling from red-hot growth earlier this year. A drop in energy prices could be a silver lining to an otherwise painful recession. But, at this point, the impact of continued high natural gas prices on the economy remains anybody’s guess. “What none of us know is how much demand response you’re going to get from industrial customers,” said Driscoll. By contrast, oil is starting to look cheap. Crude oil prices have plunged by $10 a barrel since hitting 10-year highs of $35 a barrel in mid-October. On the New York Mercantile Exchange Wednesday, crude oil for February delivery fell $1.61 to $26.35 barrel.

The drop in oil prices come as increased OPEC production — sparked by this year’s oil price surge — flows through the world’s pipelines and record low inventories begin to rebuild. Ironically, that buildup comes at a time of year when oil stocks are normally being drawn down. GAS RELIEF A YEAR AWAY But natural gas isn’t so easy to ship: more than 90 percent of the natural gas consumed in North America is produced here. Drilling for gas is up sharply — from a low of 362 in April of 1999 to current levels of about 862 in the latest week, according to Baker Hughes. Still, natural-gas producers can’t punch holes in the ground fast enough to head off the supply crunch, and analysts say it will take a year or longer to catch up. For one thing, there just aren’t enough rigs to go around. Worse, oil producers can’t find workers to run them, according to Michael Heim, an analyst who follow the industry at A.G. Edwards in St. Louis. “With this economy, when the companies laid people off, they went and found other jobs,” he said. “That’s where the bottleneck is now — finding quality personnel to supervise the drilling.” Ironically, natural gas was supposed to be the cheap alternative to soaring oil prices. But increased demand from new home buyers and greater reliance on natural gas for power generation has helped spark the recent supply squeeze.

The spike in gas prices couldn’t come at a worse time for California’s utility industry, which is in the throes of an energy crunch that has sent electric prices skyrocketing and utility companies reeling. Caught between deregulated prices from their suppliers and regulated prices for their customers, California’s two largest utilities, Pacific Gas & Electric and Southern California Edison, face a financial meltdown, as they pile up billions of dollars in debt. U.S. Energy Secretary Bill Richardson meet with the governors of several western states today in Denver to discuss solutions. At issue is whether the government should re-regulate wholesale energy prices, which have surged from about $35 per megawatt-hour a year ago to as much as $1,400 this year.

“I am concerned that we may be on the verge of a liquidity crisis,” Richardson said. Thousands of employees at California utilities could be laid off because of the spiraling costs, he said. And repairs and maintenance at key facilities may have to be curtailed because of the lack of cash. Reuters contributed to this story.

http://www.msnbc.com/news/506058.asp

-- Martin Thompson (mthom1927@aol.com), December 20, 2000


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