Economides: US gas price spikes expected

US natural gas prices "definitely" will climb to $4/Mcf this fall, with world oil prices escalating to $40/bbl probably within a year, unless producers dramatically increase spending to offset depletion and to supply growing demand, a University of Houston professor told reporters at the Offshore Technology Conference Monday in Houston.

But that's nothing compared with what will happen when the real gas shortage hits North America within 2 or 3 years, says Michael J. Economides, coauthor of "The Color of Oil," a book about the economics of the oil and gas industry.

With rapid depletion of current gas resources and steady escalation of demand, Economides said, freezing Chicago residents will be paying a whopping $40/Mcf for gas in the middle of some not-too-distant winter. "It's the biggest energy story not being written about," he claimed.

Economides said US gas producers are not discovering enough new gas reserves to offset rapid depletion of current reserves and meet growing demand that is expected to hit 30 tcf by 2010. It's the same scenario that Matthew Simmons, president of Simmons & Co. International, Houston, has been arguing for years.

Moreover, Economides said many of the gas-fired power plants now being planned won't be built in time to meet demand projections. "You couldn't buy a turbine today if you wanted to. General Electric has a 3-year backlog," he said.

Still, he predicted, "We'll see $4 gas before $40 oil."

Oil prices
Economides expects world oil prices to spike again next year, however, because most OPEC members don't have the excess capacity to meet their new production quotas. "Saudi Arabia maybe has 1 million b/d of excess capacity. But the rest of them don't. Venezuela, [the US's] biggest supplier, is working hard to meet its present production quota," Economides said.

His supporters point out that he correctly predicted the last price peak of $30/bbl back when oil was still selling for $11/bbl.

At his OTC press conference, Economides rejected what he calls the "myth" of low lifting costs in Saudi Arabia and other major Middle East countries. Nor can big producers turn oil production on and off at will, he says. Any significant ramp-up in world oil production will take huge capital investment, said Economides.

Based on his "Production Activation Index" of the investment required to add one new barrel of daily oil production, Economides said such additions would cost Saudi Arabia and Venezuela's western oil-producing provinces some $3,500/bbl. Even allowing for the potentially huge reserves a new discovery could add in those countries, Economides said both Saudi Arabia and Venezuela would lose money on any oil market price less than $21/bbl�the same clearance level required for West Texas Intermediate crude.

"The Kuwait oil minister estimated that a $7 billion investment would be required to bring an additional 350,000 b/d production in North Kuwait, implying an activation index of $20,000/bbl. Iraq has announced that it seeks $30 billion for an incremental production of 4 million b/d, resulting in an activation index of $7,500/bbl," he said.

To turn a profit on that production, Iraq would need a market price of $76/bbl, while Kuwait's equilibrium oil price is an eye-popping $201/bbl, he figures. In contrast, Economides said, the mature shallow-water region of the Gulf of Mexico has one of the lowest activation indexes in the world�$1,000/bbl, about the same as West Africa. That translates into an equilibrium oil price of $4/bbl for the gulf and $6/bbl for West Africa.

Economides acknowledged that his Production Activation Index calculations are simplistic. Actual results will involve other factors, including shifts in market shares, the move to greater gas consumption, and the "seemingly-always underestimated positive effects of investing in technology," he said.

Nonetheless, said Economides, an average oil price of more than $25/bbl for the next 2-3 years "is not unrealistic."

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