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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

production from within the former Soviet Union (FSU), but certainly not to the pre-breakup peak of 12 million bbl per day. Fortunately, North Sea production also continues to confound predictions of imminent decline and, in fact, has risen somewhat. At the same time however, OPEC production (excluding Iraq) still seems to linger only moderately above the June 2000 quota of 25.4 million bbl per day, in spite of unilateral increases by Saudi Arabia and the involuntary price band mechanism adopted in June 2000. This mechanism called for an increase of 500,000 bbl per day if the OPEC crude basket price stayed above $28 per bbl for more than 20 days.

Nevertheless, according to the EIA, average OPEC output during the first six months of 2000 was 28.3 million bbl per day (including Iraq) and 25.8 million bbl per day (excluding Iraq). 3 Those figures are a little higher than the equivalent 1999 output reported by the EIA, but well below the 1998 output. Moreover, these data seem to disagree somewhat with other analyses that show OPEC output prior to its September 10-11, 2000 meeting in Vienna has been nearer 25.9 million bbl per day (excluding Iraq), or roughly 500,000 bbl per day above the quota. In fact, this variance may explain why the OPEC decision to increase production by 800,000 bbl per day effective Oct. 1, reached at its meeting in Vienna, had little impact on oil prices, as the decision may have been seen by the market only as largely validating current overproduction.

All in all, U.S. consumers so far have been able to deal with the escalation of gasoline and diesel and jet fuel prices. However, the predicted fly-up in distillate fuel oil prices for residential users into the $2 per gallon range during the winter of 2000-2001 has caused a very strong reaction and government intervention.

On Sept. 22, it was announced that 30 million barrels of crude oil would be released from the U.S. Strategic Petroleum Reserve (SPR), which now contains about 570 million barrels. This release is only a swap, however, to be replaced by 31.5 million a year later. The release was to take place this month at a rate of 1 million bbl per day. Already, by early October, the release had temporarily reduced crude oil prices somewhat. However, it is unlikely to produce any significant increase in the supply of distillate fuel oil and other premium distillates (gasoline and diesel and jet fuel), because U.S. refining capacity is nearly fully utilized and stocks are extremely low. Any increase in heating oil prices will, of course, be compounded by the unavoidable increase in natural gas prices to what will undoubtedly be record levels on a nominal basis.

Natural Gas: Now Linked With Power Markets

By contrast with crude oil, the current price and supply situation for natural gas appears more likely to have repercussions beyond the boundaries of gas markets, including the large number of politically sensitive heating customers.

The extent of these problems can be seen in gas prices in the NYMEX futures market