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Gas Crisis Forum: Is It Real, or Is It Hype?

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.
Fortnightly Magazine - August 2003

and many new North American import projects are advancing rapidly. Worldwide LNG production capacity continues to grow rapidly along with the specialized tanker fleet needed to transport product to market, stimulated not only by demand but also by significant improvements in liquefaction process and tanker construction costs. With some moderation in the historical veto power of not-in-my-backyard resistance, environmentally and economically sound import projects should come to fruition. With its inherent ability to immediately ramp output up or down in response to price signals, a dispersed network of LNG import terminals would provide the additional benefit of damping price volatility-not a popular idea with commodity traders but a real benefit to the U.S. economy.

In conclusion, the North American upstream natural gas industry, as currently configured, is in a period of transition, not irrevocable decline. The solutions to currently perceived supply shortfalls lie in incremental, market-based capital investment, not new government programs designed to accelerate deployment of politically favored technologies and energy supplies. The industry alarmists would have us believe that $6.00+ gas prices are with us for the indefinite future. The politicians have responded with calls for drastic federal intervention, with the promise of all the insight and benefits such intervention has provided in the past. I say the market is already well down the road to providing a solution to the current supply/demand imbalance and should be allowed to find its own way. Barring some truly extreme and pervasive weather patterns, we should know by next spring whether I'm right or wrong. A $3.50/MMBtu gas market is all it would take to spur a combination of accelerated exploration and development of available North American gas resources and investment in an LNG supply network to better integrate our market with the vast pool of un- and under-developed gas discoveries around the world. Let's keep our eyes on that prize and send Chicken Little packing.

  1. Two noteworthy contrarians have come to my attention to date: Judith Warrick, in an April 3, 2003, Morgan Stanley industry analysis (), and Vinod Dar, in a commentary appearing in the June 6, 2003, issue of ("There Is Tightness in the Gas Market, but Surely no Crisis"). I recommend them both to your attention.
  2. Special thanks to my colleague Jerry Eyster for his ongoing analysis of this issue.
  3. In a recent example of this obsession, the June 12, 2003, report indicated an increase of 125 Bcf nationwide. August NYMEX futures immediately fell 10 percent, despite the fact that inventories were still well below normal at this time and no fundamental information about the overall supply/demand situation had changed.
  4. Gas gathering, processing, compression, and transmission.
  5. Note that the drilling rig count, in itself, is a poor indicator of future incremental gas reserves and deliverability. Industry commentators point to the 4,000+ rigs at work in 1980-81 in contrast to the current figure of around 1,000. Forgotten are the billions of dollars of speculative capital that was wasted on highly dubious prospects. In a low-price environment, prospect quality must be high to justify the expenditure of risk capital; in flush