Ed Schweppe (edschweppe) wrote,
Ed Schweppe

Natural gas the cure? Maybe not ...

As wcg noted recently, oil prices aren't likely to go down anytime soon. Now, a story on the Associated Press wire implies that natural gas markets aren't going to help matters anytime soon:
On the brink of the 21st century, a group of energy experts peered into the future of natural gas, and what they saw was quite rosy -- and quite wrong.
Something is broken in the economics of natural gas, say people inside and outside the industry. The bright dream of an economy built squarely on clean-burning natural gas is slowly deflating. Although we still derive almost a quarter of the country's energy from natural gas, its share will slip in coming decades, federal forecasters now say.

"What's going on now is so dysfunctional, it is really remarkable," says industry consultant Jim Choukas-Bradley.

Retired Yale economist Paul MacAvoy says price jerks and fuel crimps could soon rival California's electricity nightmare of 2000-2001. "Everything that has gone wrong in electric power is going to go wrong with natural gas, unless we do something," he says. "It's just a few miles down the road."

What went so wrong with natural gas?

The industry largely blames old fields and self-defeating government policy, and such explanations are widely accepted. The trouble is, they don't explain the breakdown very well.

Skeptics are beginning to suspect other powerful forces -- ones at work within the industry itself.
Industry leaders insist that collusion to sit on supplies cannot happen. After all, the five leading producers supply less than a fifth of domestic natural gas. So if they were to charge unjustifiable prices, smaller ones could undersell them, right?

Maybe not, if producers are more unified than they seem. Many small producers own rights, not rigs. They take a back seat to bigger companies that actually do the drilling under joint ventures, shared leases and royalty agreements.

Former federal energy regulator John Wilson estimates that the five producers named in the antitrust lawsuit can influence most domestic output through such arrangements, without changing their official production figures.

"Prices have stayed up because people in control of supply decided they could keep them up," says Wilson, who has supported the lawsuit with his analysis.

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