How gas prices snuck up on us all

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How gas prices snuck up on us all

By Martin Cej, CBS.MarketWatch.com Last Update: 1:20 AM ET Jan 4, 2001 NewsWatch

SAN FRANCISCO (CBS.MW) -- Natural-gas prices have shot to record highs in recent days, seemingly catching analysts, investors and consumers unawares, and prompting many to ask, "Well, how did we get here?"

The February contract for natural gas was recently changing hands on the New York Mercantile Exchange for about $8.19 after rising last week above $10 per thousand cubic feet for the first time. Last year, the average price per thousand cubic feet of gas was $2.27.

Today on CBS MarketWatch Stocks catch their breath California power market prepares for rate move Commentary: Japan, a party pooper? Rough holiday for retail companies Rough and tumble trading for Net stocks More top stories... CBS MarketWatch Columns Updated: 1/4/2001 1:05:22 PM ET Among the factors driving the demand are the huge growth in the U.S. economy, a colder winter than expected, and increased reliance on gas to generate relatively clean electricity to keep high-tech companies running.

'Paying the piper'

"You have to pay the piper," said Wilf Gobert, head of research at Calgary, Alberta-based brokerage Peters & Co., which specializes in the oil and gas industry. "Here we are in winter, and gas is being withdrawn from storage at the fastest rate in at least five years, and current storage levels are at their lowest in five years."

About 94 percent of America's natural-gas imports come from Canada, and Canadian gas accounts for about 16 percent of total U.S. consumption, according to the Energy Information Administration.

On the demand side of the equation, the U.S. economy is the world's largest and is still -- although slowing -- in the midst of its longest-ever continuous expansion. The economy, as measured by gross domestic product, grew at a pace of 2.2 percent in the third quarter, according to the government's most recent figures. It had surged at a pace of 5.6 percent in the second quarter.

Demand for cheap energy to fuel this lengthy economic expansion swelled just at a time when consumers' needs were at relative lows due to a four-year spell of unseasonably warm winters.

Meanwhile, oil prices languished through 1998 and 1999, undermined by a glut of supply and anemic Asian economies. Petroleum companies cut back on their exploration and production programs as the costs outweighed potential returns. Instead, producers met demand -- which was artificially low due to unseasonably mild weather -- with existing wells, reserves and an efficient infrastructure.

Natural-gas exploration suffered doubly, as it takes longer for capital expenditure to result in increased supplies than traditional crude exploration and production. Gas drillers were reticent to open their wallets with no sure sign of demand picking up.

"There was insufficient money being spent on new supplies of natural gas," Gobert said. "There was such a huge anti-development psychology and as long as the weather was mild, people said 'who needs more?'"

"Now that the weather has changed, everything has gone wrong," he said.

Big chill

So far this heating season, which officially begins in North America Nov. 1, the number of so-called heating-degree days has been higher through each of the first eight weeks, according to Peters & Co. For the previous four years, there were fewer than normal heating-degree days, which translated into relatively tame demand from storage facilities.

"We went into this winter with an unusually low level of gas inventory, and that's what's triggered the price spike," Gobert argued.

Indeed, the American Gas Association reported that natural-gas storage levels dropped 209 billion cubic feet last week to 1.7 trillion cubic feet. Last year at this time, there were 2.4 trillion cubic feet of natural gas in storage to meet the demands of America's demand.

Unfortunately for U.S. consumers and some utilities, U.S. storage is at 52 percent of full capacity, and demand remains high with three months yet remaining in the heating season.

The law of supply and demand seems to indicate that gas prices won't plunge toward last year's levels anytime soon, but that same law also points to a gradual unwinding of these record high levels in coming quarters as companies and consumers switch to other, more economical fuels. And as a few companies that rely on gas, such as some utilities, fertilizer makers and steel companies, shutter plants and factories, unable to bear the cost burden.

"We aren't going back to last year's levels," Gobert said. "Electricity production from natural gas will continue to be an expensive process for the foreseeable future, but not at these levels, which are panic levels."

With supply unlikely to jump much in coming months, it will take a fundamental decline in demand -- and higher winter temperatures -- to bring prices back down to earth.

http://cbs.marketwatch.com/news/current/gas_analysis.htx?source=htx/http2_mw

-- Martin Thompson (mthom1927@aol.com), January 04, 2001


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