It was one of those "don't know whether to laugh or cry" moments in early June when Citizens for Responsibility and Ethics in Washington (CREW) called for the Justice Department's antitrust division to investigate whether Chesapeake Energy Corp., ConocoPhillips, and others conspired to reduce natural gas production.
CREW acknowledges gas prices are at a 10-year old and inventories are rapidly increasing. It claims producers violated antitrust laws only to reduce supply and drive up prices. Strangely, it also faults producers for "pushing for approval to dig more wells" that would increase supply.
What CREW views as a nefarious plot by producers, others with more sense and a basic knowledge of market fundamentals recognize as just good business to reduce production in an already saturated market—especially in a capitalist economy that runs on profit. It's the same reason builders stopped construction when the bottom fell out of the housing market and why the government pays farmers not to grow crops for which there is too little demand.
One needn't reduce supply to drive up prices, of course. The same thing can be accomplished by increased demand. Gas prices have been unusually low for years, much lower now than the price of competing coal or fuel oil. If consumers really wanted more low-cost energy, they would be gobbling more bcfs of gas now. But the market is sated. There's nowhere for additional gas to go. Even storage is filling up.
CREW admits it has no evidence of illegal activity in the gas industry. It wants the Justice Department to use its police and subpoena powers to dig up proof of CREW's suppositions—if such proof exists. Justice and Congress frequently have hauled in oil and gas chief executives to cuss and discuss alleged crimes, but they've rarely turned up a thing since President Teddy Roosevelt broke up Standard Oil.
Why gas?
Still a big investigation of the oil and gas industry might distract some voters' attention from the faltering US economy in the last months of the presidential election. Founded and funded by previous Democrat officials, CREW may be nonprofit but it's not nonpartisan. Some note the close relationship between labor unions and Democrats vs. lack of union membership among upstream workers in the oil and gas industry. Some cynics say that's why CREW focuses on natural gas production while US auto manufacturers also are reducing output because of diminished sales.
The Federal Reserve reported US factory output dropped 0.4% in May, down from a 0.7% increase in April as auto manufacturers cut production for the first time in 6 months. Ward's Automotive Group data show US cars and light trucks sold at a rate of 13.7 million in May, the weakest period this year and down from 14.4 million in April. Even the increase in car sales during the first half of this year fell below levels that analysts expected. Meanwhile, first-time applications for US unemployment benefits increased in mid-June, the number of new jobs decreased, and consumer prices saw the biggest monthly decline since December 2008. However, officials reported if flagging auto sales were excluded, retail sales were little changed last month.
If CREW members are incensed about reduced gas production, they'll probably have a spit fit when producers cut back oil output. In terms that apply equally to gas, analysts in the Houston office of Raymond James & Associates Inc. see continued pressure on oil prices in a "severely oversupplied" market. "While lower demand is part of the story, robust production growth in the US is the monster lurking in the shadows. We expect this bogeyman to fully show himself before the end of this year. Accordingly, we believe Saudi Arabia will begin to noticeably cut production in the fourth quarter, while US producers will begin to curb activity in upcoming weeks," they said.
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