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Gas Crisis Forum: Prices Pointing Skyward!

Gas prices are likely to remain high in the near term.
Fortnightly Magazine - August 2003

Gas prices are likely to remain high in the near term.

There are many possible new sources of supply that could dampen the high-priced natural gas environment in the long-term, but most signs point to a high-price environment in the near-term. One could argue that changes in storage in the production area between years has the potential to start heading north soon, because domestic production capacity between July and the end of 2003 will be larger than last year. 1 This will put downward pressure on prices. But other sources of supply don't look as good. When one looks at Canadian imports, Mexican exports, liquefied natural gas (LNG), the Rockies, and overall demand for gas, the outlook for much lower gas prices by the end of the year is pessimistic.

Canadian Imports and Mexican Exports: How Will They Offset Each Other?

Natural gas imports from Canada were, until the last several years, a major source of new supplies, and often the stopgap source of supplies in the depth of winter. For example, Canadian imports were 21 percent of domestic natural gas production in December 2000, when the average price of gas was near $9.00/MMBtu. Between November and December of 2000, imports rose by 1 billion cubic feet (Bcf) a day. 2 Without the 1 Bcf increase in Canadian imports, the price would have been still higher.

Yet, Canadian imports will most likely not increase and not be a stopgap source of supplies this year.

Some Canadian companies and consumers believe our recent policies on Canadian exports of agriculture, lumber and other commodities to the United States amount to economic warfare. Moreover, the export/import pipe capacity between the United States and Canada has increased hardly at all in the last two years, and last winter much of this pipe space was near or above capacity limits.

There are reasons not to push this capacity to the limit. The chance of operational problems increases at these times. Demand for natural gas also continues to grow in Canada. 3 Accordingly, Canadian companies may be unwilling or unable to supply incremental gas to the United States. This may even work to their advantage. If cold weather occurs and domestic supplies become tight, price levels will soar. When a necessity such as natural gas is perceived to be in short supply, prices can double from already high levels. Hence, a reduction in natural gas export volumes from Canada may be more than offset by an increase in price, and Canadian export revenues could grow, not decline, from lowered Canadian export volumes.

Although Canada is not expected to contribute to additional supplies this year, future years look brighter. There are six new export pipeline expansion proposals into the northeastern United States through 2005, representing 2.1 Bcf/day of capacity. 4 The natural gas for these planned pipe builds would be shipped from fields offshore the Maritime Provinces in Canada. This is a relatively new source of natural gas developed during the 1990s. But gas imports to the United States from Canada may be offset by U.S. gas exports to

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