[BETA] Fortnightly

Chicken Little has cornered the market on gas price doom and gloom, but the data is inconsistent on whether high gas prices are here to stay.

A near-universal consensus of alarm appears to be emerging concerning North American gas supply adequacy. The steady march upward of spot gas prices and NYMEX futures over the past year confirms this coalescence of market sentiment. Way back in June 2002, you could still buy Rocky Mountain wellhead production for about $1.25/MMBtu, although Eastern U.S. markets had already exceeded $3.00/MMBtu.

Today, that Rocky Mountain gas supply would cost you about $5.00/MMBtu, while Eastern supplies sell for well over $6.00/MMBtu. Storage inventories were blown down to record levels during the past heating season, gas producers continue to issue dire warnings about their ability to replace dwindling deliverability, and private and public prognosticators predict many years of supply curtailment and concomitant high prices. Both investment banking firms and brokerage houses are thumping their drums in unison on the latest hot sector as regulators and politicians notice and begin to address the reported problem in their individual, often heavy-handed ways.

My problem with all this brouhaha is the tiresome familiarity of the increasingly strident alarms coming primarily from the upstream gas industry as echoed and amplified by my fellow energy sector consultants and pundits. ¹ Crisis makes for good business to an interesting assortment of players, and I wouldn't want to spoil the party but for my concern that an overblown and transitory economic threat often leads to unnecessary and untimely legislative and regulatory intercession, typically yielding unintended and disruptive results. We need only think back fondly to the National Energy Act of 1978 and all its misguided particulars for (non)crisis management, or the current attempts at state and federal levels to fix the 2000-2001 "California crisis," itself the result of hype, botched legislation and regulation, and finally, direct political intervention, wreaking havoc in what was an otherwise sustained market response to anticipated shortfalls in wholesale power supply.

There are perhaps five observed gas industry features and trends that are used to support the argument for a serious and persistent gas supply/demand crisis:

• Prevailing futures prices and forward curves;
• Gas demand growth expectations;
• The near exhaustion of storage inventories over the past winter;
• Rapid deliverability decline rates from recently drilled gas wells; and
• The inability to muster a timely industry response, in part reflected in the weekly rig count data.

In what follows, I would like to address each of these subjects, highlighting certain mitigating factors that have not been given much attention. I then propose an alternative view of what is happening right now in gas markets and what will happen in coming months-where we find ourselves in the continuing interplay of cyclical business behavior and resource depletion and substitution-and therefore, what if any extraordinary market interventions are required now to accelerate supply augmentation and moderate absolute price levels and price volatility.

Prices

To begin, let us bear in mind that commodity price levels are not set or changed by rational and exhaustive analysis of supply/demand fundamentals. As