The escaping price of natural gas

The United States is skating on the edge of another big jump in natural-gas prices this spring - perhaps even a shortage that, depending upon the weather and its severity, could leave residents shivering and cause some industrial customers to curtail operations.

Analysts describe the situation with varying degrees of alarm, from "shaping up for an unmitigated disaster" to "tight" on supplies. Last week, Alan Greenspan, chairman of the Federal Reserve, spoke of his "chronic concern" about how a sharp spike in natural-gas prices would affect the economy.

Most Americans would quickly feel the effects of a severe shortage - and subsequent price hike. Natural-gas utilities, with 64 million customers in the US, provide 24 percent of all energy consumed. Their gas heats and cools millions of homes, and increasingly is burned to generate electricity. Natural gas is both a fuel and a feedstock for the nation's $460 billion chemical industry with its 1 million employees.

"The problem is awfully serious," says Matthew Simmons, head of Simmons & Co. in Houston, an investment bank specializing in the energy industry. "It's shaping up for an unmitigated disaster."

Driving the concern are data suggesting that natural-gas production in the US is tumbling faster than anticipated. As a result, environmentalists, industry representatives, and others are marshalling their arguments about what needs to be done to stave off a crisis. Ideas range from pushing for greater conservation and efficiency to opening new areas for drilling to importing more liquid natural gas (LNG).

Mr. Simmons and others say the US confronts a problem not only in the immediate future, but is likely to see natural-gas shortages for years to come. In a September report, the National Petroleum Council warned that the US is on a course to pay an additional $1 trillion in natural-gas costs over the next 20 years as a result of shortages.

Paul Wilkinson, policy vice president of the American Gas Association, sees a "tight" gas supply for several years. Natural-gas production in the lower 48 states dropped half a percentage point (or less) in 2003, and he expects a "modest" increase in gas production over the next few years.

Simmons, by contrast, believes gas production in the US and Canada has already peaked. That means the US will become increasingly dependent on imported LNG - just as its dependence on imported oil has grown, he says. Imported oil now accounts for 60 percent of US oil consumption.

As partial validation of his concern about gas supplies, Simmons cites a new study by FirstEnergy Capital, a research firm in Calgary. Using new data, the company found that natural-gas production in the Gulf of Mexico has declined from about 14 billion cubic feet per day in 2001 to 11.3 Bcf/d in May 2003. The Gulf provides 23 percent of all US natural-gas output.

"Essentially it looks as if the Gulf is in fairly sharp decline," says Martin King, author of the FirstEnergy study. He calls it "a wake-up call."

Simmons suspects Gulf output could be as low as 9.5 billion Bcf/d by now, as gas wells tend to peter out faster than do oil wells.

With this situation, the nation is likely to face even more intense debate on the best ways to meet energy needs in the future.

Environmentalists say the priority should be on conservation; greater efficiency of appliances, lighting, and homes; and boosting renewable energy resources, such as wind, solar, or biological.

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