Fossil Fuels and Energy Policy: Understanding the New Natural Gas Economy
How gas supply and price disruptions now outweigh oil imports as the nation's real energy problem.
During much of this past year, we have seen concern rising among government officials, members of Congress, media representatives, and financial and economic analysts about escalating crude oil prices. The price increases stemmed in part from earlier actions taken by 10 of the eleven members (i.e., excluding Iraq) of the Organization of Petroleum Exporting Countries (OPEC), to reduce supply to boost price levels that were believed to be unsustainably low. However, relatively little attention has been paid to a potentially more severe problem-the consequences of the natural gas drilling slump in the Unites States during the two prior years.
This drilling slump in 1998 and 1999 has caused the rapid run-up of natural gas prices seen of late. It also seems to have reduced deliverability in the lower 48 states, even though the most recent (December 1996) forecast by the Energy Information Administration (EIA) might have suggested otherwise.
The EIA had projected a lower-48 wellhead productive capacity of about 70 billion cubic feet (Bcf) per day, compared to actual dry gas production of 52 Bcf per day. 1 Instead, rather surprisingly, the slump in gas drilling led to a rate of replacement of gas reserves in 1998 of only 83 percent. That low rate occurred even though the average active gas rig count for the year was near its high since 1990, and even though there were 12,106 gas well completions-the highest during the period 1990-1999 .
Then came 1999, when the much lower counts for active gas rigs and gas well completions were predicted to lead to even more disappointing results. However, as is shown in Table 1, reserve replacement was at a 10-year high-118 percent. That figure was reached because of record net revisions and adjustments, which offset the lowest total discoveries since 1994. 2 In fact, this aberration may explain the gas deliverability problems that have occurred, and which likely will grow worse, because of the less-than-required rate of refill of seasonal underground storage that was to have been achieved by the end of the 2000 reinjection period on Oct. 31.
As of early October, refill was projected to total only about 2,700 Bcf of working gas, compared to the generally accepted minimum of 3,000 Bcf. The resulting gas price escalations will affect not only current gas users, including heating customers (who are far more numerous than oil heating customers). They also could have an impact on electric power supplies and prices, because nearly all urgently needed new generating capacity is gas-fired.
In short, the current preoccupation with high crude oil and refined products (gasoline, distillate fuel oil, etc.) prices diverts attention from other energy problems. At least as serious today is the tightness of natural gas supplies, caused by the drilling slump of 1998-1999, which has led to unprecedented price escalations and a substantial increase in longer-term price expectations.
Of course, it is true that crude oil acquisition costs for U.S. refiners rose from the unsustainable lows of $10 per barrel