As home heating bills soar, businesses see energy costs cut profits

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As home heating bills soar, businesses see energy costs cut profits

Saturday, March 24, 2001

By H. JOSEF HEBERT THE ASSOCIATED PRESS

For a decade natural gas has been the fuel to love. It's clean, plentiful and found close to home. Most important, it was cheap.

But natural gas prices have soared to as much as five times what they were 18 months ago, leaving consumers -- from the elderly trying to heat their homes to executives who are shutting down chemical plants because of high gas prices -- wondering what happened:

Are producers profiteering? Maybe. At the very least, they're raking in billions of dollars.

Will the high costs, which have eased in recent weeks, rebound this summer and fall? Supplies remain tight. If the summer is a hot one, prices could again soar.

Can future production meet growing demand? Most experts say there's plenty of natural gas; developing it will depend on price and new pipelines.

Should the government reimpose price controls? A few advocates say yes; the Bush administration and most economists say no.

Government regulations produced "a couple of real disasters" -- gas shortages in the 1970s and too much supply in the early '80s, says Paul MacAvoy, a Yale economist who has followed the industry for 30 years. Despite greater risks of occasional price spikes, MacAvoy argues, a free market provides lower prices and adequate supplies in the long run. President Bush's energy plan, expected to be unveiled next month, will stress expanding natural gas production and building new pipelines, but experts agree it will be years before those efforts significantly influence the gas market. Meanwhile, demand for the fuel will continue to rise.

It may be some time, if it happens at all, before prices again will be as low as they were over a 15-year period covering the late 1980s and all of the 1990s, energy economists say.

During that stretch the wholesale price of gas hovered around $2 per 1,000 cubic feet. After accounting for inflation, natural gas prices actually declined by almost a third between 1985 and 1999, according to the American Gas Association.

Then in the first six months of last year, the price doubled, then doubled again. By Christmas and into the new year it had spiked to nearly $11 for 1,000 cubic feet. It's been even higher in power-starved California, prompting charges of price manipulation by suppliers and pipeline operators.

As the surge in gas prices drove up home heating bills by 50 percent or more in many areas, businesses and industrial plants saw energy costs cut into profits. Some chemical plants using natural gas as a feedstock have seen foreign competitors grab business because of the high U.S. energy costs.

Redland Brick Inc. of Williamsport, Md., has seen the cost of firing up its kilns at four plants soar. An expected energy bill of $4 million is twice what it was in 1999, says James Vinke, the company's president.

In recent weeks, wholesale gas prices have begun to fall back to about half what they were in December and early January, but even at $5 per 1,000 cubic feet, they remain more than double what they were in the winter of 1999.

The Energy Information Administration predicted in its latest energy forecast that prices will not ease much this year or next. And energy experts say prices could just as easily spike again if supplies lag and demand jumps during a hot summer or unusually cold weather next winter.

"It is becoming clear with each passing month that we grossly underestimated the demand pressure facing natural gas," said Matthew Simmons, a Houston-based investment banker and energy analyst who frequently has warned of an impending natural gas crisis.

Simmons helped craft a 1999 National Petroleum Council report that predicted that, over the next 15 years, natural gas demand will increase by 40 percent to 31.5 trillion cubic feet annually. With power plant construction moving at a fast pace, that demand level now could come in five or six years, says Simmons.

Natural gas is by far the cleanest-burning of fossil fuels. Because it emits far less air pollution or greenhouse gases than coal or oil, environmentalists embrace it as a transition from hydrocarbons to solar technology or hydrogen fuel cells, still decades away from widespread use.

Natural gas also is plentiful. An estimated 2,449 trillion cubic feet of reserves in the United States and Canada is enough to meet today's demand for 100 years. And there is no worry about cutoffs from unfriendly nations halfway across the globe.

Nevertheless, the price explosion of the last year has prompted more than a few energy experts to wonder, only half-jokingly, whether a cartel had captured the natural gas market.

Industry representatives and federal regulators scoff at suggestions of price manipulation and collusion, although the red-hot and severely constrained California market has fueled suspicions of abuses and gamesmanship.

California regulators, for example, argue that pipeline companies have hoarded gas to boost prices, claims the companies have heatedly denied.

"I don't think you can manipulate this market. There just are too many players," says Paul Wilkinson, a vice president of the American Gas Association, which represents power utilities dealing with both higher wholesale costs and the ire of their retail customers.

Still, the run-up in oil and gas prices produced astounding profits last year.

According to the Energy Department, the 37 leading independent oil and gas companies saw profits in 2000 soar nearly 400 percent to $3.2 billion, most of it from natural gas. Earnings from U.S. oil and gas production among major multinationals jumped 155 percent to $22.2 billion, about half of that amount from gas.

Gas marketing companies, a group dominated by a handful of giants such as Enron Corp., Duke Energy Corp. and Dynegy Inc., have reaped hefty rewards as the commodity often is traded several times as it flows from producer to consumer.

"It's basically economics ... supply and demand," says Paul Holtberg, an analyst at the Gas Technology Institute, a research organization funded by the gas industry.

That view is shared by many economists not associated with the gas industry, but not all.

"There's been a breakdown in competitive markets; they're not working," insisted Charles Wheatley Jr., a longtime energy lawyer. "As a result the (market) players can put prices to consumers that are way above any respectable cost."

Wheatley represents a group of municipally owned utilities that has petitioned the Federal Energy Regulatory Commission to cap natural gas prices at $2.74 per 1,000 cubic feet.

If there's manipulation, it's not by Rob Bayless, 45, who with his 25 employees operates a small gas drilling company in Denver that his father started in 1958.

"Gas prices in the $8 and $9 range ... are way too high," he said. "You don't want people mad at you."

But he also recalls the not-so-good days that were far too many in the late 1990s, when the wholesale price of natural gas fell well below $2 per 1,000 cubic feet.

That's when Bayless bought some federal gas leases in New Mexico, Colorado and Utah. He didn't have any money to drill, but he bought them anyway.

"With higher gas prices, now we can develop them," he says.

The past year has seen a frenetic pace of gas drilling. The number of drilling rigs jumped by 46 percent to about 900, the biggest such surge over a single year in a quarter century. But the amount of gas flowing into the market has not increased by much.

"We're drilling at higher rates just to get the same amount of gas out of the ground," says Skip Horvath, president of the Natural Gas Supply Association, a producer trade group.

http://seattlep-i.nwsource.com/business/naturalgas24.shtml

-- Martin Thompson (mthom1927@aol.com), March 24, 2001


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