Gas prices are determined by demand, supply, depletion, and substitution.
DemandAccording to the Energy Information Agency (EIA), the demand for natural gas is expected to jump 50 percent within the next 20 years. Electricity generation will account for the lion's share of this new demand because 90 percent of new electric plants will be fueled by natural gas. Home heating will also affect demand; for every 100 new homes built, 70 will be heated with gas.
SupplyLast spring, U.S. Federal Reserve Chairman Alan Greenspan said, "The recent surge in oil and gas prices appears to be a long-lasting phenomenon. Natural gas has doubled from $2.50 in 1999 to $5 today, and its supply has been constrained by the inability to import significant gas supplies, other than from Canada."
Since 1973, gas imports from Canada have increased from 5 percent to over 15 percent. Canadian Hunter Exploration Ltd. Chairman Jim Gray said, "North America is just about to hit the wall on supply and demand for natural gas." The EIA expects Canadian gas imports into the United States to decrease 17 percent by 2009.
Gas production can't keep up with demand. The National Petroleum Council estimates that within 20 years we must be importing 14 percent to 17 percent of our gas from outside North America.
Liquefied natural gas (LNG) ships from as far away as Algeria and Australia will be docking in U.S. harbors. Cooling natural gas to -258 degrees F changes 625 cubic feet of vapor into one cubic foot of liquid. Two-dozen LNG terminals are on the drawing board, but safety and security concerns have allowed only one to be approved for construction in the last 25 years.
DepletionUnlike corn, we can't grow a new crop of natural gas. As gas is depleted, what remains becomes even more scarce. Scarcity drives up prices. Higher prices trigger more drilling. Each new well costs more to produce. Today's average gas well produces only one-third as much gas as in 1973. Even though we've increased the number of producing wells from 100,000 to more than 300,000, gas production hasn't increased.
SubstitutionWhen one commodity can be substituted for another, its price reflects the commodity it replaces. Because natural gas can be substituted for oil products like gasoline, its price is linked to oil by a formula called "barrels of oil-equivalent." Over the next 20 years, expect oil prices to steadily climb as 3 billion people become new consumers of energy-burning products.
Natural gas isn't just a commodity; it's a strategic resource. The less we rely on other countries for energy, the better. When given a choice, many consumers will invest more to conserve energy. An investment in conservation pays dividends in dollars. Even at today's gas prices, a typical family in Phoenix saves about $2,000 over 20 years by investing in maximum efficiency and comfort.
Steve Howard is the founder of The ACT Group. He can be reached at either 602-678-4889 or firstname.lastname@example.org.
Publication date: 03/21/2005