Viridian Note 00224: Price Spikes

Key concepts

natural gas prices, gas shortages, gas utilities, energy crises

Attention Conservation Notice: Makes the California Crisis look like a picnic!

Links: http://www.feedmag.com "Thirteen Ways of Looking at a Blackout" The Pope-Emperor waxes wroth about California on the FEED website.

A marvelling public scratches their heads and offers Slashdot-style feedback at the new and innovative PLASTIC site. http://www.plastic.com

((((To my lasting regret, my home burns natural gas, which is, at least, much, much better than coal. I therefore received the following note this week from my natural gas supplier.)))

Source: Southern Union Gas consumer leaflet

"PREPARE YOURSELF...

This gas bill is probably much higher than in past months for two reasons. One reason is the unprecedented increase in the wholesale price of natural gas. Natural gas prices have increased more than gasoline prices. By law, Southern Union Gas must pass through our gas cost to you with no profit. Unfortunately, these market increases mean your bill could be more than 50% higher than last year.

"The other reason is colder weather. The last three winters have been warmer than normal. This winter may be colder than normal. Colder weather means you use your furnace more often and therefore use more gas. Higher gas costs, combined with higher consumption, results in a higher bill."

"SOUTHERN UNION GAS (logo)"

(((Let's make no mistake here; I'm all in favor of higher bills for fossil fuels. In fact, it looks like I personally will soon be paying less for green electricity than my Austin compatriots are paying for dirty fossil fuel power. It's Viridian Nirvana!

(((Fossil fuel price spikes, however, are a serious matter. We may be heading for some. Not just in California. All over the place.)))

Source

Simmons & Company International http://www.simmonsco-intl.com

(((Here we have some cogent remarks from a prominent Houston oil and gas investment banker. If you check around on his website, you will see that Mr Simmons has a rather long history of forecasting that his industry will come apart at the seams. He's kind of morose and lugubrious, but he's no crank and he has bona-fides as an analyst.

(((Back in the 1970s energy crisis, the planet wasn't "running out of oil," but there were severe production and distribution bottlenecks. The markets went nuts. With enough cold weather and the right market psychology, this could happen again.

(((Let's not succumb to mere paranoia here. The energy market doesn't have to be manipulated by any sinister cabal of top-hat capitalists and OPEC warlords in berets. On the contrary: in the past few years, the energy markets have become just as lively and daffy as the stock market. California's markets are particularly goofy and dysfunctional, but the other ones aren't that much better.

(((It didn't require the Gnomes of Zurich to create a weird boom in Yahoo! stock. A very weird gas-market this year is a distinct possibility. The necessary fear is already there on the streets of San Francisco, and gas reserves are low. A little nervous "top up the tank" behavior from the thriving consumerist masses, and an energy crisis will become a self-fulfilling prophecy.

(((A massive gas shortage is just about the only way that the utility sector will ever achieve the dizzying stock heights previously occupied by the dotcoms. Getting the population to meekly go along with this would require a crisis mentality and a lot of blackouts, but there's no shortage of blackouts. Blackouts come pretty cheap.)))

Source: speech by Matthew Simmons

U.S. Department Of Energy

Office Of Natural Gas And Petroleum Technology

Strategic Initiatives Workshop, Queenstown Maryland, December 6, 2000

"OUTLOOK FOR NATURAL GAS: IS A TRAIN WRECK PENDING?

(...)

"A year ago next week, the National Petroleum Council (NPC) delivered to the DOE its benchmark study on the challenges facing the natural gas industry. These challenges result from natural gas becoming the fuel of first and only choice for America to grow its use of electricity (...)

"As one of the authors of this report, I can assure you that we were careful not to whitewash the severity of these challenges, and a conscious effort was also made not to frighten the users of natural gas. (...) (((No no no... couldn't have 'em frightened!)))

"Over 200 dedicated individuals volunteered significant time and expertise to help complete this study on a fast- track basis. It has been billed, rightfully, as the most important study ever completed on natural gas and its future.

"It is becoming clearer with each passing month that we grossly underestimated the demand pressures facing natural gas.(...) In my opinion, the report grossly underestimated the number of rigs needed to get these reserves out of the ground. (...)

"In early April 2000, the NYMNEX price of natural gas edged above $3 and has since not dropped below that mark. It only took another month or two for prices to clear $4. As soon as hot summer weather arrived, natural gas prices passed the $5 mark. By late fall, even $5 gas was beginning to look like a bargain as $6 to $6.50 prices swept across the face of North America. $7 was a ceiling that lasted one day. Suddenly, it was becoming quite clear that something had gone wrong with the NPC gas-pricing model.

"To me, the biggest energy shock of the year is now taking place in California, the country's most prosperous and heavily populated state. At the beginning of this week, natural gas prices at the California border exceeded $20 per Mcf, an oil price equivalent of over $100 a barrel! This is not northern Vermont in a blizzard. This is a real cash price in a mild weather state that happens to be populated by as many citizens as several European countries."

((In other words, Mr. Simmons is predicting the California model on a national scale.)))

"What went so wrong in the world of natural gas in such a short period of time? Why were so many aspects of the NPC study outdated so quickly? Is all this a temporary aberration of Mother Nature and sheer bad luck? Did OPEC somehow get its hands on our natural gas energy supply too?

"Could these high prices soon retreat to their historical norms? Or, is there a chance we look back a few years from now and simply shake our heads at the collective naivete of so many throughout the energy world who blissfully ignored hundreds of flashing yellow and occasional red lights about natural gas?"

(((I'm kind of liking this "shaking our heads at collective naivete" model. That's what is expected of California now == "Gee! What were we thinking! Of course we should dutifully export all our wealth to Houston." And some few among us == Reliant Energy, El Paso Energy, Dynegy, Duke Energy, AES, Southern, Calpine, and Enron in particular == will be shaking our naive heads all the way to the bank!)))

"It is time for the industry and government to take off their rose colored glasses and stop wishing for things that might simply not be in the cards. It is time to begin preparing a national energy contingency plan for what we will do if natural gas supplies cannot grow by any significant degree."

(((I'm not claiming that Mr Simmon's dark speculations are going to happen. Neither is he. Another warm, mosquito- ridden Greenhouse Christmas would take the steam out of the natural gas market in a big hurry. Fossil fuels were ridiculously cheap in the 90s, and speculators were repeatedly punished. After years of famine in the Clinton boom, however, the drilling industry really is pretty decrepit.

(((So let me suggest something. If you're on Viridian List, and you were sorta, kinda, thinking of doing something progressive and ambitious.... One of those expensive, time-consuming, put-it-off-till-later energy reform activities... Like, say, a new overcoat for the water heater, or some solar panels, or maybe a complete rethink of your entire industrial production system.... You should probably do that now. It's sure to pay back eventually, anyhow, so it's not like you're wasting your money chasing Microsoft downhill. If you end up price- spiked to the wall in the Bush years, that investment will pay back really fast.

(((Doing that now will be much cheaper than doing it when and if the economy stagflates. Under those condistions, the efficiency companies will be overwhelmed with demand. And the only guys making real money will be pirate generators == if they can stay out of court, that is.)))

(((Back to Mr. Simmons:)))

"Over the years, the industry's wonderful can-do attitude, coupled with an over-cautious mindset that prices will never rise, created an industry-wide blindness to the many energy problems looming over the horizon, and the train wreck about to occur in the energy markets. Too many problems were ignored for too long. It is a sad commentary to have to make, but I fear we are now in the early days of a severe energy crisis that will take at least a decade to fix."

(((A decade == or, let's say, at least one Presidential Administration.)))

"We are in the early days of a pending winter of discontent for our energy supplies. Unless mild weather quickly returns, we seem to be headed for a situation where gas storage is at the lowest levels ever seen (...)

"If summer weather is hot, particularly in the eastern third of the U.S., we could see gas storage withdrawals occurring in the summer months. If this does not happen this coming summer, it will almost certainly occur a year later. And, once gas withdrawals begin in the summer, the U.S. has one winter left before we have run our storage system dry. Once this occurs, we will be forced to relegate natural gas to a seasonal use." (((Ration coupons! Yeehaw!)))

(((What's the solution? Drilling rigs galore! And money! Lots and lots!)))

"It needs realistically high energy prices so we can pay the construction costs for what will become an Energy Marshall Plan to expand and rebuild our energy complex in the course of the next decade. (...) No one wants the energy crisis that is descending across our country, but it is here."

(((Actually, to judge by utility valuations on Wall Street, some of us kinda, sorta, do want this energy crisis. And there doesn't seem to be any real reason for a market-spike in natural gas to stop at merely "realistically high." Was Amazon "realistically high"? If that behavior happens in the energy sector, it's gonna be the most exciting thing to happen to energy in a long, long time.)))