Natural gas supply concerns top US energy policy agenda

Maureen Lorenzetti
Washington Editor
WASHINGTON, DC, June 12 --With the prospect of natural gas prices escalating this winter, US policy makers are scrambling to look proactive even though Mother Nature carries more influence than politicians regarding possible gas price spikes.

In its forecast, the Energy Information Administration said Tuesday the natural gas market is tight, with gas storage levels lagging well behind normal levels. Spot natural gas prices likely will average $5-6/MMbtu through December, the agency said.

But EIA Administrator Guy Caruso told the House Energy and Commerce Committee that prices could go higher if there is an abnormally hot summer followed by a cold winter. Shifts in near-term production could also impact prices, he said.

"It appears that for every 1% that production falls below our base case assumptions, we can expect 5-10% higher peak prices this winter," Caruso said. "These estimated average impacts mask the potential for much more dramatic spikes in prices for short periods."

Energy traders are anticipating a tight market, with option prices implying a 25% chance that the peak price will exceed $7.40/MMbtu, according to the US Federal Reserve Board.

Meanwhile, Republicans and Democrats are hoping to deflect any political damage those higher prices could inflict on their reelection chances. And with a US presidential primary season around the corner, energy issues could become an early campaign issue, especially if home heating and motor fuel prices soar, political analysts say.

Responding to a request by Sec. of Energy Spencer Abraham, the National Petroleum Council plans a June 26 emergency meeting to discuss natural gas supplies.

Congress also is weighing in. The House Energy and Commerce Committee held a high-profile hearing on the subject June 10. Alan Greenspan, chairman of the Federal Reserve, was the star witness. Senate hearings also are planned on gas price concerns.

Last month, Greenspan grabbed the attention of industry lobbyists and energy analysts when he told the congressional Joint Economic Committee that US natural gas supply issues were a "very serious problem" that needed to be examined.

At his most recent congressional appearance, Greenspan expanded on that statement, touting LNG imports as the most efficient way to alleviate supply concerns (OGJ Online, June 11, 2003).

Policy options
His speech focused almost exclusively on supply issues and did not specifically address what influence that mandated energy efficiency measures could have on demand.

Greenspan generally avoided offering an opinion on pending legislation, although he did seek to discourage Congress from enacting subsidies as a way to boost domestic production or build an Alaskan Highway gas pipeline.

LNG, he said, is not the only answer to narrowing the supply gap; there are still "numerous" unexploited sources of US gas production. But, both regulators and Congress need to be more consistent about what is the "agreeable" tradeoff between energy and environmental concerns, he suggested.

"I do not doubt we will continue to finetune our areas of consensus. But, it is essential that our policies be consistent. For example, we cannot, on the one hand, encourage the use of environmentally desirable natural gas in this country while being conflicted on larger imports of LNG. Such contradictions are resolved only be debilitating spikes in price," he said.

Road ahead
Political realities may get in the way of finetuning the consensus Greenspan envisions.

The House passed a sweeping energy bill in April designed to dovetail with the White House's energy blueprint. But the energy bill includes new tax incentives that the Bush administration does not specifically endorse, and that Greenspan himself discourages.

At the same time, the House voted to strip from the bill a proposal that called on the federal government to inventory all oil and gas resources on federal lands and waters, including areas now under a drilling moratoria.

In the Senate, an inventory provision survived in the pending energy bill. That legislation also is expected to include tax incentives as well as government incentives for an Alaskan gas pipeline. The bill also requires President George W. Bush to issue periodical reports on the state of the US natural gas market through 2015.

Final negotiations between the House and Senate over an energy bill are expected during September, at the earliest. But the volatile natural gas market is expected to dominate the summer energy policy agenda.

House Republican leaders, many of whom are from oil and gas producing states, are expected to make the case that short-term natural gas price concerns will turn into a long-term crisis, unless a comprehensive energy bill becomes law.

"If the train wreck occurs, and natural gas prices skyrocket, and shortages occur; who will be at fault? The producer? The consumer? Or perhaps, the federal government? We see a storm brewing on the horizon. We need to prepare for it," said House Energy and Commerce Chairman Billy Tauzin (R-La.).

But, Greenspan rejected assertions by Tauzin and other lawmakers, including Rep. Joe Barton (R-Tex.), that the US needs to boost domestic production to stabilize prices and reduce reliance on potentially unstable foreign energy suppliers.

"If North American natural gas markets are to function with the flexibility exhibited by oil, unlimited access to the vast world reserves of gas is required," Greenspan said during his testimony.

Later in an exchange with Barton, Greenspan said the US is "committed irrevocably to globalization for a good reason," and that "it is in the "interest of the country not to be protectionist. We don't have a choice."


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