Natural Gas Prices Rise as Worries Over Energy Build

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Tuesday, August 22, 2000

Natural Gas Prices Rise as Worries Over Energy Build

Outlook: Pipeline blast and tropical storm are latest to roil markets already facing threat of shortages and stiffer electric bills, especially in California.

By CHRIS KRAUL, Times Staff Writer

Saturday's deadly pipeline explosion in New Mexico and a developing hurricane in the Caribbean triggered a spike in natural gas prices Monday--the latest evidence that the nation is edging toward a new energy crisis.

The accident and the storm--whose economic effects may be felt in California's already roiling energy markets as early as this week--provide fresh examples of how the country's stretched-thin energy needs are now more vulnerable than at any time in decades to market factors, including the weather and even the possibility of civil disturbances in producing countries.

A crisis mentality pervades the once-placid natural gas market, in which already historically high prices spiked upward by 7% Monday in the wake of the pipeline explosion that killed 11 people and shut down one of eight gas mains feeding California. If Tropical Storm Debby, meanwhile, becomes a full-fledged hurricane, it would force Gulf of Mexico operators, who supply a quarter of the nation's natural gas, to shut down many of their rigs. But long after the pipeline is repaired and the storm has passed, energy worries will continue to occupy industry analysts, businesses and everyday consumers to a degree unseen since the Arab oil embargoes of the 1970s: * California's electricity grid has narrowly dodged rolling blackouts this summer. The typical electricity bill in San Diego and parts of Orange County has doubled this summer, prompting state regulators Monday to institute rate caps. * Residents of the Northeast face steep heating oil prices this winter and possible shortages. * Gasoline prices continue to inflict pain at the pump, as crude oil continues above $30 a barrel, levels not seen since the Persian Gulf War. * Analysts fear that the U.S. is so short of natural gas and heating oil that it faces a possible crisis this winter if temperatures dip below the norm--with rationing and industrial shutdowns distinct possibilities.

"It hasn't been like this since the late 1970s. You could see some industrial users facing some real tough choices about shutting down. And it wouldn't even take a severe winter for it to come to that," said Edward Kelly of Cambridge Energy Research Associates in Houston.

In the first trading day after the weekend pipeline explosion in New Mexico, spot prices for natural gas were up 7% to $4.75 per million British thermal units. Officials at the California Power Exchange, which runs the state's primary market for wholesale power, said the rise would probably cause "negative ramifications," meaning higher wholesale electricity prices, in the next few days. That's because relatively clean-burning natural gas is increasingly the fuel of choice for electric power plants in the state, as well as around the country.

The expected effects of higher natural gas prices point up the fact that energy deregulation--once heralded as a boon to consumers--has instead given them a lot more pain than benefit, more risk than reward, than anyone expected. "Some people had this religious fervor that the market would get it right--all we had to do was get out of the way," said Severin Borenstein, a UC Berkeley professor and director of the UC Energy Institute. "But, in fact, it's a lot more complicated when it comes to deregulating a market, whether it be airlines, trucking or, in this case, electricity."

Although deregulation has been hit by several market setbacks and structural glitches, none has been more damaging than the unexpectedly high price of natural gas. And analysts are nearly unanimous in saying that prices could get worse before improving. David Pursell, an economist at Simmons & Co. investment bankers in Houston, says the nation faces a "deliverability shortfall" of natural gas in the next 18 months. "The worst-case scenario--and we think it has a relatively high chance of happening--is that in February and March, there may not be enough natural gas capacity in well production and storage, [so] that you have curtailments of supply, which last happened in the late 1970s," Pursell said.

A rate cap approved Monday by the California Public Utilities Commission will provide short-term relief for 1.2 million consumers in the San Diego Gas & Electric service area. The utility's customers are the first in the nation to bear the brunt of unregulated--and thus far higher--electricity prices. Rates for consumers served by Southern California Edison and Pacific Gas & Electric are frozen until as late as 2002. But consumers all over the state can expect to pay higher rates at some point, since the utilities have made it clear they will try to recover the difference between the frozen rates and the wholesale prices they are paying now.

There seems little prospect of the market settling down any time soon: Appreciable new supplies of electricity are at least a couple of years away, when new power plants come online. Meanwhile, statewide demand, heightened by the booming (and increasingly plugged-in) economy, keeps rising at a 2% annual clip, according to the California Energy Commission. The dire energy situation might not yet feel like a crisis to U.S. consumers who remember the deprivation and gasoline lines of the 1970s. In that era of Arab oil embargoes, the specter of shortages caused the nation's businesses to cut back economic activity, producing recessions in those years.

And the jump in energy prices so far has mostly been absorbed by the nation's manufacturers, who do not think they have the pricing power in today's market to pass higher costs along to consumers, said Rajeev Dhawan, director of econometric forecasting at the UCLA Anderson Forecast Project.

That--and the fact that energy accounts for a much smaller portion of the nation's economic output than 25 years ago--is why inflation is up only slightly, even as crude oil and natural gas prices have more than doubled since 1998. Nevertheless, prolonged higher prices will inevitably filter down to consumers, which could whip up inflation once more. And the real possibility that natural gas may be rationed to manufacturers and utilities this winter could produce, to some degree, the same inhibiting effect on the economy as seen in the '70s.

"If you are worried about energy being delivered, you may not make a contract or investment decision based on that," Dhawan said. "That causes a reduction in economic activity, and that is one of the biggest causes of recession." Even industry observers like Ron Barone of PaineWebber in New York who do not expect an energy crisis say that the price of natural gas--and by extension that of electricity--will probably remain high for the next 18 months at least, citing a "structural shift" in the energy market.

"The demand for gas is growing 3.5% to 4% a year, faster than most people anticipated, due to the fact that the demand for electricity is growing rapidly. Why? The wealth effect, the Information Age and the Internet. We are manufacturing and plugging into the walls million more computers each year," Barone said. Only a couple of years ago, many industry leaders were saying that electricity prices would remain low indefinitely because of plentiful supplies of cheap natural gas. The conventional wisdom also had it that crude oil prices would stay low because technology was helping the U.S. and other countries free themselves of reliance on Middle Eastern oil.

But many of the assumptions underlying those rosy projections have gone wrong. First, demand for natural gas in the U.S. has been growing faster than the region's ability to supply it, a shortfall that has been masked by three successive mild winters. At the same time, low prices in 1998 helped to discourage new drilling. "The whole energy system we are faced with is straining to meet the demands of customers, whether you look at oil, gas, coal or electric," said John Felmy, director of policy analysis at the American Petroleum Institute.

"There have been no new refineries built in 25 years, and pipelines are difficult if not impossible to build anywhere. "The whole system is under great stress."

http://www.latimes.com/news/front/20000822/t000078930.html

-- Martin Thompson (mthom1927@aol.com), August 22, 2000


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