Consultant: Lower oil prices would benefit natural gas users

Taking a contrarian view of the market, a US energy consulting firm concludes natural gas prices could fall significantly if oil prices continued declining. But ICF Consulting concludes the 30 million bbl of oil which President Clinton has authorized for release from the Strategic Petroleum Reserve (SPR) is insufficient to bring oil prices down enough to calm the natural gas market.


Taking a contrarian view of the market, a US energy consulting firm concludes natural gas prices could fall significantly if oil prices continued declining. But ICF Consulting concludes the 30 million bbl of oil which President Clinton has authorized for release from the Strategic Petroleum Reserve (SPR) is insufficient to bring oil prices down enough to calm the natural gas market.

Recent attention given high heating oil prices overlooks the fact natural gas is the principal fuel used to heat US homes, says the Fairfax, Va.-based ICF. More than 60 million US homes heat with natural gas�more than six times the number that use heating oil, it says. Customers who heat their homes with natural gas could see heating bills that are 50% or more higher this winter than last.

ICF says many observers have incorrectly blamed high natural gas prices on low natural gas supply deliverability, growth in natural gas demand in the power sector, and low levels of injection of natural gas into storage. ICF Consulting says its analyses of market dynamics conclude that the recent increase in natural gas prices is primarily a result of high oil prices.

Therefore, any successful efforts to reduce petroleum prices would also have the beneficial effect of lowering natural gas prices, these consultants conclude. ICF estimates an extra 2-3 million b/d for a month or more are needed to reduce crude oil prices from current levels of more than $30/bbl to a more stable level of $20-25/bbl.

Then, ICF concludes, natural gas would cost homeowners only about 20% more this year than last to heat their homes.

Conventional wisdom suggests oil prices have little influence on gas prices in today's market. But ICF Consulting says its model of the North American gas industry reveals this so-called "decoupling" appears not to be currently true.

Oil and gas prices decouple when excess gas supply exists and oil prices are low. In such circumstances, the gas market is driven by gas-on-gas competition, with gas prices at the burnertip below parity with petroleum prices.

Today, the situation is the opposite, according to ICF, because oil prices are high and gas supplies are tight. As a result, oil and gas prices at the burnertip are near parity and have again become coupled.

ICF claims observers underemphasize the degree to which prices are set on the margin. Even slightly increased demand for gas resulting from users switching from oil to natural gas raises natural gas prices.

ICF consultants say one possible solution to drive gas prices down is to utilize more oil from the SPR, since it has the capability to deliver about 4 million b/d for 90 days and still keep sufficient reserves in the ground for emergency purposes

However, Congress would have to approve such a measure. Alternatively, if the Organization of Petroleum Exporting Countries�or Saudi Arabia acting independently�provided a substantial amount of incremental oil supply to the market, the result would be the same.

More in Government