- The Washington Times - Thursday, October 13, 2005

More than two years ago, because he was alarmed by trends in the natural-gas prices, Federal Reserve Chairman Alan Greenspan testified twice before congressional committees. In June 2003, he told the House Energy and Commerce Committee that “[y]esterday the price of gas for delivery in July closed at $6.31 per million British thermal units (Btu). That contract sold for as low as $2.55 in July 2000 and for $3.65 a year ago.”

Well, last month the contract for near-month gas delivery reached a record-level $14.58 per million Btu. Today the price of natural gas is about three times its average price from 2000 through 2005, and it is nearly seven times the average price of $2 during the 1990s. Compared to the change in the spot price of benchmark West Texas Intermediate crude oil, which sold at the equivalent price of $10 per million Btu in late June and $10.80 last week, the NYMEX natural gas futures near-month contract price increased from $7 per million Btu to more than $14 during the same period. Thus, over a three-month period, the comparable price of natural gas (i.e., per million Btu) has gone from 30 percent below crude oil to more than 30 percent above it.

America’s natural-gas crisis, which had been slowly but steadily evolving when Mr. Greenspan sounded the alarm before Congress two years ago, has suddenly erupted with a ferocity that matched the power of Hurricanes Katrina and Rita, whose double whammy along the Gulf Coast paralyzed much of the natural-gas industry there. No region provides the United States with more natural gas than the Gulf, where 10 billion cubic feet of gas is produced each day, or about 20 percent of U.S. production and 16 percent of U.S. consumption. The two hurricanes shut down two-thirds of Gulf gas output, and as of Wednesday, nearly 60 percent of gas production in the Gulf of Mexico remained off-line.

In terms of moderating the natural-gas price spike precipitated by Katrina and Rita, little can be done to mitigate the short-run consequences. In some parts of the country, for example, winter-heating bills could increase more than 70 percent, while the average increase will likely approach 55 percent over last year, according to the government’s Energy Information Administration (EIA). The average household will probably pay more than $1,100 this winter for heat, about $400 more than last year. Worse hit in the short run will be businesses that use natural gas as a major feedstock, including the chemical and fertilizer industries. Firms that use natural gas to power their factories could find their energy source shut off under worst-case supply shortfalls, necessitating layoffs and output curtailments.

Over the long term, much can be done. If consumers, industries and Congress react to the Katrina/Rita-precipitated natural-gas disaster by treating it as an overdue wake-up call to a crisis that had already been simmering for some time, then there are several long-term crisis-mitigating actions that can be taken. Indicative of the size of the task ahead is the fact that the EIA projects natural gas demand to increase by more than 41 percent between now and 2025, as natural gas consumption rises from 22.4 trillion cubic feet in 2003 to 31.6 trillion in 2025.

Following the first oil crisis of the 1970s, and the deep recession it produced, electric utilities and other industries switched many electricity-generating plants from using oil as a feedstock to using natural gas. Nuclear-generated electricity increased as well. In 1973, for example, petroleum-fueled and gas-fueled power plants produced 17 percent and 18 percent of electricity output, respectively, while nuclear-powered plants generated 4 percent. Last year, electricity output was more than double the 1973 levels and petroleum was responsible for less than 3 percent, while natural gas produced 18 percent and nuclear power generated 20 percent of the nation’s electricity output. Significantly increasing nuclear-generated electric power could reduce future reliance not only on the polluting, greenhouse-gas-emitting coal-powered plants; emphasizing nuclear could lower our long-term dependence on natural-gas-supplied plants as well, despite the latter fuel’s obvious appeal.

Domestic production of natural gas must also increase, particularly in the Outer Continental Shelf as well as in the Arctic National Wildlife Refuge and other areas of Alaska and public lands in general. Most important of all, natural-gas imports must increase. Through pipelines, Canada currently supplies the United States with about 16 percent of our natural-gas consumption. But Canada’s reserves are projected to last only another nine years. By default, over the long-term, imports will have to come from Russia and the Middle East. These overseas imports will require major investment in Liquefied Natural Gas terminals and conversion plants. A separate editorial will address this extremely important issue.

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