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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

warm fall and winter, consumers will need to cut back expenditures on other items as expenditures on natural gas continue at elevated levels. The chance that this could move the economy back into recession is very real indeed.

Wholesale Markets: Volatility in the Mix

Another notable change in the energy business in the last two years is that Enron, Dynegy, and other major energy companies have exited the short-term contract wholesale part of the business. Short-term markets have gotten thinner, which tends to increase price volatility and perhaps price.

Increasingly, producers are no longer using wholesalers to help them sell their natural gas. On June 24, 2003, it was reported that Apache with 1 Bcf/day of North American production had, after five years, ended a 10-year agreement with a marketer. 9 It would not be surprising if many of Apache's target customers are major utilities. Utilities are increasingly signing longer-term contracts for natural gas with producers and not relying on intermediaries. 10 The problem is that some utilities often have little incentive for effectively negotiating the price down since they often pass this cost onto consumers. High costs supply them with large cash flows and long-term contracts supply them with a steady long-term cash flow.

  1. Production capacity is based on the lagged relationship between rigs and development wells and actual production. There is about a six- to nine-month lag between rigs and actual production, and it is the average relationship of number of rigs over time that matters. The relationship between production and production capacity has been determined using statistical analysis. Hence by the end of June of a year we have estimates of production capacity for the rest of the year and can compare this to production capacity in the previous year.
  2. Since imports/day were about 11.5 Trillion MMBtu and the average price was $9.00/MMBtu, these imports amounted to about 100 million dollars. Since trade back and forth across the border is about 1 billion dollars/day the natural gas trade was a significant portion of overall trade at the time. In January 2001, Canadian imports reached their highest level ever of about 11.7 Trillion MMBtu.
  3. Nonetheless, Canadian production may increase this coming winter as rigs have been running 50 percent and more above year-earlier levels. Yet an item to watch this year, along with increased demand for gas in Canada, is the exchange rate between the U.S. and the Canadian dollar, which changed significantly in the last year. This may have implications for investments. If a Canadian producer received American dollars for shipments of natural gas, the producer would have received in February 2000 $1.60 in Canadian dollars when the U.S. dollar was exchanged for the Canadian dollar to purchase additional production equipment in Canada. On June 24, 2003, the same producer would have received $1.36 for the same dollar according to the exchange rate published in the . Luckily, the large rise in the price of natural gas between last year and this year has swamped the decline in the exchange rate, but this is something to continue to watch.