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ICF Blames High Gas Prices on Crude

ICF Blames High Gas Prices on Crude

Despite the conventional wisdom that there has been a decoupling of natural gas and crude oil prices, ICF Consulting says it is primarily the close tie between the two commodities under the current circumstances that has been responsible for high natural gas prices this year.

Many observers have incorrectly blamed high 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 said. Analysis of market dynamics, however, shows the recent increase in natural gas prices is primarily a result of high oil prices. ICF Consulting has used its proprietary North American Natural Gas Analysis System (NANGAS) to determine that oil and gas prices decouple when excess gas supply exists and oil prices are low. In that scenario, 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, ICF noted. 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. Observers under-emphasize 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.

As a result of this recoupling, any successful efforts to reduce petroleum prices would also have the beneficial effect of lowering natural gas prices, ICF said. However, the release of 30 million bbl of oil from the Strategic Petroleum Reserve by the Clinton Administration will barely send a ripple through the energy market. "This amounts to only about 0.5 million barrels a day when daily U.S. demand is about 20 million barrels per day," the group noted... "Significantly stronger measures are necessary if the intent is to dramatically lower oil prices." ICF said utilizing more of the SPR would do the trick but that plan likely would face stiff opposition in Congress.

"It would take somewhere in the range of 2 to 3 million barrels a day for a month or more to reduce crude oil prices from current levels of more than $30 per barrel to a more stable level of $20 to $25 per barrel. Then, natural gas prices would only be about 20% higher than last year for homes heating with gas," said ICF Consulting.

For more information on this topic, contact Michael Godec, director of ICF Consulting's natural gas practice at 703-934-3869; For additional information, visit the firm's web site at http://www.icfconsulting.com.

Rocco Canonica

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