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Is U.S. Natural Gas Headed Toward Excess Supply?

Electric Power Research Institute (EPRI)
Several recent analytical studies, sponsored by EPRI, indicate that there is a plausible scenario that gas supplies will increase and that excess gas supplies could emerge over the intermediate-term, perhaps within two years.

This relatively plausible scenario represents a significant departure from the popular trade press and has a number of implications for both the power and natural gas industries. Chief among these implications is the likelihood for price moderation and the impacts that such price moderation could have on various facets of both industries.

In the United States, natural gas is used for nearly 20% of electric utility generation, yet it accounts for 55% of the industry’s entire fuel expense ($50 billion out of $91 billion in 2005). Over 200,000 MW of gas-fired capacity was added between 2000 and 2006. The majority are combined-cycle units. While those new units have operated at only 33% capacity utilization (annual averages for the past three years), the power sector’s demand for gas has been growing as more and more units have gone online.

Presentations on the studies of natural gas supply were made to the EPRI-EEI Annual Power and Fuel Supply Seminar late last year. In addition, the studies are summarized in a recent issue of the EPRI newsletter Energy Markets and Generation Response.

Over the last five years U.S. gas supplies (i.e., domestic production and imports) have been declining. This has led to both a tight supply and demand balance and high natural gas prices. In addition, many industry observers project that these trends will continue and, as a result, forecast further increases in gas prices.

However, there is now clear evidence that an opposite set of conditions could materialize-potentially over the next two years. The evidence for increasing production arises from two developments…
(4 May 2007)
According to EPRI’s About Us:

The Electric Power Research Institute (EPRI), with major locations in Palo Alto, California; Charlotte, North Carolina; and Knoxville, Tennessee, was established in 1973 as an independent, nonprofit center for public interest energy and environmental research. EPRI brings together members, participants, the Institute’s scientists and engineers, and other leading experts to work collaboratively on solutions to the challenges of electric power. These solutions span nearly every area of electricity generation, delivery, and use, including health, safety, and environment. EPRI’s members represent over 90% of the electricity generated in the United States. International participation represents nearly 15% of EPRI’s total research, development, and demonstration program.

Where gasoline is cheap

Steve Hargreaves, CNNMoney
And why places like Saudi Arabia, Iran, China and Russia are making it more expensive for you.
In Saudi Arabia gasoline costs about 45 cents a gallon. In Iran it’s 33 cents. Venezuelans pay less than a quarter.

These absurdly low prices are a direct result of massive government subsidies.

While these numbers are not adjusted for cost of living, it’s fair to say that drivers in those countries are getting a good deal.

But it’s straining government budgets. More importantly, it’s not allowing the free market to do its job. Higher prices on the open market are not leading to a drop in demand, which is keeping the cost of oil high for everyone else.

“Roughly two-thirds of new oil demand is coming from countries that have subsidized oil markets,” said Christopher Ruppel, a senior geopolitical analyst with the consulting firm John S. Herold. “So demand is not going to be affected if oil goes from $60 a barrel to $80.”

By no means does this let motorists in the United States off the hook. Gasoline consumption in this country has been rising even faster than normal, around 2.5 percent annually over the past couple of months, despite average prices in excess of $3 a gallon, close to an all-time record.
(4 May 2007)
A case of “Why do you notice the splinter in your brother’s eye, but do not perceive the wooden beam in your own eye?” (Matthew, ch 7), since the U.S. give huge direct and indirect subsidies that encourage oil consumption. A striking example is the military expenditures required to ensure reliable sources of petroleum. -BA

Interview with Lisa Margonelli, author of Oil On the Brain
Jim Puplava, Financial Sense Newshour
Oil on the Brain is a smart, surprisingly funny account of the oil industry-the people, economies, and pipelines that bring us petroleum, brilliantly illuminating a world we encounter every day.

Americans buy ten thousand gallons of gasoline a second, without giving it much of a thought. Where does all this gas come from? Lisa Margonelli’s desire to learn took her on a one-hundred thousand mile journey from her local gas station to oil fields half a world away. In search of the truth behind the myths, she wriggled her way into some of the most off-limits places on earth: the Strategic Petroleum Reserve, the New York Mercantile Exchange’s crude oil market, oil fields from Venezuela, to Texas, to Chad, and even an Iranian oil platform where the United States fought a forgotten one-day battle.

In a story by turns surreal and alarming, Margonelli meets lonely workers on a Texas drilling rig, an oil analyst who almost gave birth on the NYMEX trading floor, Chadian villagers who are said to wander the oil fields in the guise of lions, a Nigerian warlord who changed the world price of oil with a single cell phone call, and Shanghai bureaucrats who dream of creating a new Detroit.

Deftly piecing together the mammoth economy of oil, Margonelli finds a series of stark warning signs for American drivers.

LISA MARGONELLI is currently an Irvine Fellow at the New America Foundation. She has written for the San Francisco Chronicle, Wired, Business 2.0, Discover, and Jane, and was the recipient of a Sundance Institute Fellowship and an excellence in journalism award from the Northern California Society of Professional Journalists. She is based in Oakland, California.
(5 May 2007)