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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.
Fortnightly Magazine - November 15 2000

(bbl) seen in late 1998 and early 1999, to the low to middle $30s at their highs during fall 2000. In reality, however, the oil price increase at its most recent peak was still no higher than the increase in nominal (i.e., not deflated) terms experienced after the outbreak of the Iran-Iraq war in the fall of 1980. (And in deflated terms, the recent highs in crude oil prices were well below this earlier peak, although close to the fly-up following the invasion of Kuwait by Iraq in August 1990.)

By contrast, natural gas markets hold potentially wider ramifications. Gas supply and price disruptions affect not only gas users, but may delay urgently needed additions to electric generating capacity, for which gas-fired turbine systems are the only practical option, for economic and environmental reasons.

At Henry Hub, La., cash market prices for natural gas increased from roughly $2.50 per million Btu during mid-September to mid-October 1999, to more than $5.00 per million Btu during mid-September to mid-October 2000. The partially deregulated electricity market is also in turmoil, with firm on-peak wholesale prices remaining well above $100 per megawatt-hour (MWh) in a number of U.S. regions during the past three summers and reaching astronomical levels in some markets, such as Southern California. This development has precipitated controversial price caps in the $250 to $1,000 per megawatt-hour range by the new, federally regulated regional transmission organizations to protect consumers.

Overall, the gas industry must develop the infrastructure (including pipelines, storage, and new drilling technology) to serve what is likely to be a 25 percent to 30 percent increase of gas consumption just for power generation over the next 15 to 20 years. Nevertheless, in spite of the current supply and price problems, this growing reliance on natural gas is fully justified. Natural gas resources in the lower 48 states are more than adequate to make it the logical transition fuel to a sustainable energy system over the next 50 years or so, as long as policymakers will focus on the real energy problem.

The Oil Situation

The U.S. economy and individual consumers have had ample time to adjust to oil price fluctuations within the recent range. Nevertheless, we must expect continued volatility caused in part by OPEC actions.

In addition, there is the continuing threat of irrational action by Iraq, including cuts in its 2.5 million to 3.0 million bbl per day of production, or even renewed hostile actions against Kuwait. The current conflict between Israel and the Palestinian Authority and, possibly, also Lebanon and Syria, adds another potentially destabilizing factor-one that would have much more serious consequences than in the past. The reason is that spare productive capacity margins (except for the leading producer, Saudi Arabia) are low. A major influx of capital is needed to meet world demand, which has now risen to 68 million bbl per day of crude oil and 77 million bbl per day of total liquid fuels (including natural gas liquids, processing gains, and various additives).

By contrast, one positive element may develop from the slow recovery of