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Greenspan: Global Trade Will Lower NatGas Prices; Oil Prices Uncertain

In coming years increased imports of liquefied natural gas (LNG) will leverage U.S. prices down to levels competitive with natural gas prices in Europe and Asia, which currently range from $2 to $5/MMBtu, compared to the $6/MMBtu level in the United States, Federal Reserve Chairman Alan Greenspan said Friday. While predicting the lower gas prices in a speech to the Economic Club of New York, the chairman made no promises for the oil market, where the higher prices are worldwide.

Natural gas prices in the nation have historically displayed greater volatility than prices of crude oil, Greenspan said, but he expects increased global trade in gas to level off prices. He noted the higher prices engendered by decreasing domestic production already have spurred technological developments that have lowered the cost of liquefaction and transportation of LNG. Global trade "has accelerated sharply over the past few years as profitable arbitrage has emerged in natural gas prices across international markets."

The world natural gas market has a long way to go to maturity, Greenspan pointed out. "Worldwide imports of natural gas in 2003 were only 24% of world consumption, compared to 59% for oil," he said. Clearly, the gas trade has significant margin to exercise its price-damping opportunities." He itemized developments, including construction of LNG tankers, expansion of existing U.S. LNG receiving terminals and plans for many more terminals.

Currently, while actual costs to deliver LNG to U.S. terminals average about $3/MMBtu, imports are collecting the domestic price of about $6. This is while natural gas prices in Europe have ranged between $2 and $4 and prices in Japan and Korea have generally been between $3 and $5. "Unless world gas markets tighten aggressively, competitive pressures will arbitrage the U.S. natural gas price down, possibly significantly, through increased imports."

Greenspan also pointed to potential new supplies for the U.S. from Alaska and northern Canada, and notes the growing reserves of unconventional gas as mediating the natural gas price.

The Federal Reserve chairman noted that industrial gas use in the U.S. has declined 12% since 1998 as increased residential and utility use has priced others such as petroleum refineries, steel mills and paper and board mills out of the market. As long as gas prices remain high the nation will continue to lose industries which have to compete with overseas companies accessing lower-priced gas.

Some of the "price frenzy" in oil has dampened in recent weeks as oil inventories have risen, Greenspan noted, but over the long term "much will depend on the response of demand to price...Altering the magnitude and manner of U.S. energy consumption will significantly affect the path of the U.S. economy over the long term...The recent shift in expectations has been substantial enough and persistent enough to direct business investment decisions in favor of energy cost reduction.

"Of critical importance will be the extent to which the more than 200 million light vehicles on U.S. highways, which consume 11% of total world oil production, become more fuel efficient as vehicle buyers choose the lower fuel costs of lighter or hybrid vehicles."

The use of both oil and natural gas will be moderated to some degree by efficiencies engendered by the recent higher prices and by technological developments of alternative energy, but a number of factors, including political instability in oil producing countries that retards investment and the increasing demand from a rapidly-developing China weigh heavily on the oil market.

"If history is any guide, oil will eventually be overtaken by less-costly alternatives well before conventional oil reserves run out," Greenspan offered.

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