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5/22/2003

Natural gas price remains elevated

By Peter Behr
The Washington Post

After last winter’s bitter cold and painfully high heating bills, consumers were hoping for a break this spring from record natural gas prices.

It hasn’t happened. Sluggish gas production throughout the United States is straining to keep up with demand, and wholesale natural gas prices have hovered around $6 for 1,000 cubic feet this month. That’s the highest level ever for this time of year, twice the average price in 2002 and equivalent to a $35 price on a barrel of oil.

The current high gas prices will raise consumers’ heating bills again next winter because utilities need to fill underground storage reservoirs this spring and summer to ensure enough supply when cold weather returns.

Gas inventories are 38 percent below the average for the past five years, drained by last winter’s heavy demands for the fuel and stagnant gas production.

Electricity customers will suffer, too, if severe heat waves strike this summer. More than 90 percent of the power plants built since the beginning of electricity deregulation in the late 1990s run on natural gas, and that is the primary fuel for producing peak power supplies when air conditioning demand soars.

Gas companies trying to fill storage may wind up competing with generators trying to avoid blackouts, says David Parker, chief executive of the American Gas Association. “When both of them are going at it in the summer — as they may be — prices will go up.”

The situation may persist. “For the next two or three years, we are going to be in a very tight supply-demand situation,” said Craig Shere, securities analyst with Standard & Poor’s Investment Advisory Services.

Tight supplies leave the gas market vulnerable to huge price spikes from trading manipulation, as federal investigations into the 2000-01 California energy crisis have found, or when drastic weather conditions suddenly drive up demand, as happened this winter.

Experts don’t agree on how severe the natural gas shortage is or how long it will last.

John Wood, a director of the federal Energy Information Administration in Dallas, said high gas prices are once again encouraging producers to drill wells and boost production.

“The increase in rigs will accelerate, in all likelihood,” Wood said.

The number of gas drilling rigs in operation in this country stood at 795 in April, up 30 percent in the past year and closer to the 2001 record of more than 1,000, according to the Baker Hughes Inc. oil-field services company.

“We can get back to 1,000 (rigs), and if we do, we’ll be building up surpluses pretty solidly,” Wood said.

But energy consultant Michael Zenker says there are signs that gas production from fields along the Gulf Coast that have been the cornerstone of gas supplies for decades are petering out.

Consumption of natural gas by U.S. industry is down 23 percent since 1997, with high prices a major reason, says Zenker.