Natural Gas: Are Supply Shortages and Price Shocks Inevitable?
By: Richard G. Green
Senior Vice-President
LaRoche Petroleum Consultants
Dallas, Texas
For the Lincoln Heritage Institute

Natural gas is a clean, efficient fuel that is currently a North American commodity with only minor imports of liquefied natural gas from offshore sources. The United States consumes 21.5 trillion cubic feet (Tcf) per year with approximately 50 percent used for industrial purposes, 22 percent for residential use, and 14 percent each for electrical generation and commercial use. Natural gas is the source for 33 percent of our total energy consumption. Gas supply from producing wells exceeds demand in summer (non-heating) months and the excess is placed in storage for use during winter months when demand often exceeds supply. The winter of 2002-03 saw gas demands that reduced stocks in storage to relatively low levels by mid-winter and prices rapidly increased. However, the relatively mild late winter and spring resulted in robust refilling and gas in storage should approach typical 3 Tcf volumes prior to the winter of 2003-04. Prices have not yet decreased to summer 2002 levels but have decreased by over 25 percent from peak average monthly prices. Therefore, unless an exceptionally cold winter occurs, sufficient gas should exist for the coming winter and prices should stabilize near or below current levels.

The problem is longer term and involves deliverability from gas wells and ultimately supply to consumers. The price of gas has not been sufficiently robust on a predictable basis, to encourage the drilling of enough wells to ensure supply. In addition, gas wells with large sustainable gas deliverability are much more infrequently found. Thus, the average rate of decline in gas wells has been steadily increasing for over a decade resulting in the need to drill and complete more gas wells in order to maintain current deliverability. Demand for gas has been steadily increasing since 1986 and since the winter of 2000 available supply, including storage supply, has been very close to demand on an annual basis. No large gas supply is in reserve and no large gas demand decrease can occur without economic disruptions.
Oddly, the environmental movement has been touting natural gas as a clean fuel while lobbying for hydrogen fuel cells and electric cars. The effect of these vehicles would be to guarantee a natural gas shortage and high prices, because natural gas is the only viable current feedstock for hydrogen. Also, most new power plants employ gas turbines that are efficient but lack fuel switching capability. Continuous litigation by environmental activists has effectively removed large gas productive portions of the Western United States and offshore from exploitation and reduced potential natural gas production. Just as with the Clean Air Act, which inadvertently but dramatically increased the use of relatively dirty coal as an electrical generation feedstock, misguided environmental movement policies could cause natural gas shortages, price increases, and industrial disruption.
Thus the problem: The unofficial policy of the United States since the Carter administration is to insure, if possible, cheap energy to fuel the economy. Supply side economic theory depends on inexpensive commodities. Americans enjoy much lower energy costs than do Europeans and the rest of the industrialized world due to low tax rates and a well-developed, efficient gas industry infrastructure. Cheap energy allows production of goods at competitive prices even though U S labor costs are far higher than competing countries. Without cheap energy, most remaining industry in the United States would not be competitive in a world economy. However, without higher natural gas (and oil) prices and more drilling, even current production levels can not be sustained. Long term non-North American gas sources can be obtained but at a higher cost, and increased balance of payment problems. With predictable higher natural gas prices more gas could be found and delivered but if too high will be a detriment to the economy.

Thus, it appears inevitable that we will have shortages, probably of increasing severity, followed by commodity price shocks, predictable populist political whining, and unfortunate economic disruption. This will lead to increased investment in the drilling of wells, coupled with possible tax incentives and relaxation of government restrictions. In time this will lead to a natural gas deliverability glut that will once again temporarily drop prices, stimulate the economy, increase demand and once again restart the cycle of uncertainty. Without long term governmental policy and planning, based on honest scientific input from industry scientists (but not energy company managements), a balance cannot occur and the boom and bust energy cycles of the past will return.