Natural gas prices, which reached a high of $12.25 in futures trading Wednesday, could hit $15/MMBtu by the end of December, predicted analyst Philip Verleger, a visiting fellow at the Institute of International Economics and former director of the Office of Domestic Energy Policy at the U.S. Treasury Dept.
"My guess is the coming squeeze will equal or exceed the one in 2002," he said in a written report on Hurricane Katrina's impact on Wednesday. "In that year spot natural gas prices increase by 60% between August and the end of December. This year we can expect a similar if not larger increase."
Verleger said the tightness in gas will spill over into heating oil through arbitrage. "As gas prices rise, power system operators will dispatch oil- not gas-fired generation. Oil demand will go up as will prices. If supplies are tight, prices will increase even faster." He predicted that homeowners will see at least 50% increase in heating bills this winter.
The worst impact may be on gasoline prices, however, due to the refinery outages from Katrina and apparent consumer insensitivity to cost, he said. "Do I believe retail gasoline prices will reach $10? In a word 'no.' However, I also do not believe the market will clear. Some parts of the country will likely see gasoline lines."
Verleger, a former Yale professor and vise president at Drexel Burnham Lambert, predicted "very severe economic impacts" from Katrina because it will "force consumers to increase expenditures on energy drastically.
"Rising prices are going to require consumers to double expenditures on gasoline, electricity and heating fuels. Other spending will be cut and recession will follow. I am betting that Gulf Coast refineries and natural gas facilities come back online just as demand starts to collapse. This means Katrina's legacy may be an energy glut like the one experienced in 1999."
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