>Why America Isn’t The Gas Cartel
October 22, 2008
by Don White
TEHRAN, Iran – Russia, Iran and Qatar may band together to force the US and other Western countries to pay exhorbitant natural gas prices.
It will be an OPEC-style cartel on natural gas, a move which Russia is making to boost its influence in the world at the expense of the rest of us. Their energy market monopoly would span from Europe to South Asia.
Such an alliance would have little direct impact on the United States, which imports virtually no natural gas from Russia or the other nations. We get some from Canada only.
If we had any sense years ago we would have forced the Democrats to allow drilling for more oil and gas, but no. . . Democrats seem to love the split end of the flail. They better learn real fast or they are doomed to extinction.
How can he write this, you ask, when Democrats are poised to take more seats in Congress and the presidency as well? Well, it may not happen. If we get the word out, Obama is doomed. He is a weak candidate and so are all those do-nothing Democrats who will find out either in this election or in two years that Americans are angry as a wild bull.
When you excite the bull you don’t want to be standing around. You’ve got to be running down the street to safety, and that’s where the Democrats will be ruuning if they know what’s good for them. Running for office and doing nothing about energy was their past motto, but it doesn’t wash these days. Americans demand we fix the energy problem.
Do you know, America has 80 percent of all natural gas supplies in the world? Yet we import natural gas and we produce only 6 percent of world production. Is something wrong here?
Are Democrats (and Republican) s0 so naive that they can’t see the huge amount of capital leaving our shores just to heat our homes and run our cars?
Washington and Western allies worry that closer strategic ties between Russia and Iran could hinder efforts to isolate Tehran over its nuclear ambitions. In addition, the United States opposes a proposed Iranian gas pipeline to Pakistan and India, key allies.
In Europe — which counts on Russia for nearly half of its natural gas imports — any cartel controlled by Moscow poses a threat to supply and pricing.
Energy Intelligence Administration (EIA) estimates that the average residential price of natural gas in the Midwest will be about 11 percent higher than last winter, while consumption is projected to be about 1 percent higher this winter. As a result, EIA expects that the total amount spent for natural gas consumed by the Midwest residential customer during this winter will increase by more than 12 percent from the level of last winter. To understand the current high-price environment for natural gas, it is helpful to know some basics about the commodity itself and the marketplace.
Where Does Your Natural Gas Come From?
Most of the natural gas used in the United States comes from domestic production, mostly from the Gulf Coast and Rocky Mountains. The remainder comes from imports, primarily from Canada. Domestic natural gas production and imported gas are usually more than enough to satisfy customer needs during the summer, allowing some supplies to be placed into storage facilities for withdrawal in the winter, when the additional requirements for space heating cause total demand to exceed production and import capabilities. Natural gas is injected into pipelines every day and transported to millions of consumers all over the country. Much of it travels long distances from production areas to population centers through interstate pipelines owned and operated by pipeline companies. Natural gas is generally delivered to residential customers and other end-use consumers through the complex network of pipes owned and operated by local distribution companies (LDCs).
Residential Customers Natural Gas Bills?
The price of natural gas has two main parts (all cost estimates include a number of taxes):
Transmission and distribution costs – to move the natural gas by pipeline from where it is produced to the customer’s local gas company, and to bring the natural gas from the local gas company to your house.
Commodity costs – the cost of the natural gas itself.
From 2002 through 2006 the cost of natural gas at the wellhead (commodity cost) has constituted more than 50 percent of the residential price, and this trend is expected to continue through the next winter (Figure 1). This relative cost pattern differs from earlier years in which the commodity cost was consistently below 50 percent. The large commodity cost share has resulted from unusually high prices for natural gas during these winters. The high prices were driven by market conditions that included weak natural gas production despite increased drilling levels, colder-than-normal weather for long periods during some heating seasons, production disruptions from hurricane activity in the Gulf of Mexico, fluctuating net import levels, and record high crude oil prices.
Figure 1. Breakdown of Natural Gas Price Paid by Residential Consumers During
the Heating Season, 2002-2008
Mcf = Thousand cubic feet.
Source: History: Energy Information Administration, Natural Gas Monthly, September 2007.
Projections: Energy Information Administration, Short Term Energy Outlook (November 2007).
Factors That Affect Natural Gas Prices
Several underlying factors affected prices for most of 2007. Depending on the factor, each has applied either upward ( ) or downward ( ) pressure on prices. These factors include:
Improving Production – Natural gas production increased by 2.3 percent from 2005 to 2006. Some of this increase reflects the recovery from Hurricanes Katrina and Rita in 2005. Production in onshore regions expanded as drilling increased. The industry in 2006 drilled a record number of natural gas wells for a single year and drilling activity in 2008 indicates another record.
As of September 2007, the number of exploratory and developmental wells drilled surpassed the year-to-date totals for 2006 by about 5.8 percent. Production is expected to increase by about 1.3 percent in 2008. The expected expansion in 2008 reflects the impact of new deep water facilities in the Gulf of Mexico that began producing during 2007. The number of producing natural gas wells increased each year from 2000 to 2006, reaching a record level of almost 449,000 wells in 2006.
High Oil Prices – Some large-volume customers (primarily industrial consumers and electricity generators) can switch between natural gas and other fuels, such as petroleum products, depending on the prices. As a result of this interrelation between fuel markets, when oil prices rise, the competitive pressure to maintain low natural gas prices diminishes, and the shift in demand to natural gas drives prices upward.
Crude oil prices increased to a record-high $93 per barrel in October, 2007 and to $147 earlier in 2008. It stands at around $70 per barrel today. Geopolitical concerns and uncertainty in financial markets have contributed to rising oil prices over most of the year. Tight global oil market conditions are expected to persist through 2008.
Natural Gas Inventories – Based on reports from underground storage facilities for November 2, natural gas in storage reached an all-time record of 3,545 Bcf. This is 8.9 percent above the 5-year (2002-2006) average of 3,254. The record storage level reflects the favorable economics that prevailed through most of 2007, and the impact of relatively mild weather in 2006 and 2007, which reduced the need for current consumption. Natural gas inventories are expected to track at above average levels through the rest of 2008 as long as weather conditions remain close to normal.
Weather Effects – As of October 2008 there has been only minor storm activity in the Gulf of Mexico, avoiding major supply disruptions, which eased the upward pressure on natural gas prices. However, a return to normal weather this winter is expected to increase residential demand by about 3.9 percent compared with the 2006-2007 season as temperatures would be somewhat colder than last year.
Average Natural Gas Prices in the United States
Since 1999, residential natural gas prices in the United States have generally increased. The 1999 national average residential price was $6.69 per thousand cubic feet (Mcf), while the 2006 average price was $13.75, which is more than double the 1999 price.
The national average price of natural gas is only part of the story, as the prices in individual States can differ greatly. These differences are often related to a market’s proximity to the producing areas, the number of pipelines in the State, and the transportation charges associated with them, as well as State regulations and degree of competition. For example, based on 2006 data, the residential consumers along the Atlantic Coast tend to pay the most, with prices ranging from $15 to more than $20 per Mcf (Figure 2). In contrast, States in the rest of the country benefit from either indigenous production or the presence of major trunk lines traversing the State. The availability of relatively abundant supplies results in prices between $10 and $15 per Mcf.
Figure 2. U.S. Residential Natural Gas Prices by State, 2006 (Dollars per Mcf)
Source: Energy Information Administration, Natural Gas Monthly, September 2007