A dramatic rise in the six-year strip of futures prices for both crude oil and natural gas over the past three years has gone largely unnoticed as a trend that “can sigificantly affect the long-term path of the U.S. economy,” said Federal Reserve Chairman Alan Greenspan last Tuesday. He believes greater U.S. access to world liquefied natural gas (LNG) reserves would reverse this price pattern for gas.
Speaking to the Center for Strategic & International Studies in Washington, DC, Greenspan attributed the sharp rise in long-term energy futures prices to fears of long-term crude oil disruptions in the volatile Middle East, and the continuing imbalance between supply and demand in North America’s natural gas markets.
He said current spot prices began to have a more pronounced effect on long-term futures prices beginning around 2001. “The spikes in the spot price in 2000 had only a temporary effect on distant natural gas futures prices,” but “that situation changed in 2001…when the distant futures prices for gas delivery at Henry Hub began a rise from $3.20 per million Btu to almost $5 today.” After he spoke the long-term gas futures strip shot past the $5 mark.
“These elevated long-term prices, if sustained, could alter the magnitude of and manner in which the United States consumes energy,” said the economic guru. “Until recently, long-term expectations of oil and gas prices appeared benign. When choosing capital projects, businesses could mostly look through short-run fluctuations in prices to moderate prices over the long haul.”
But the recent shift in the expectations for long-term prices “has been substantial enough and persistent enough to influence business investment decisions, especially for facilities that require large quantities of natural gas,” Greenspan said.
“Today’s tight natural gas markets have been a long time in coming,” he said. Once thought of as a nuisance fuel, natural gas since 1985 “has gradually increased its share in total energy use and, owing to its status as a clean-burning fuel, is projected by the Energy Information Administration…to maintain that higher share over the next quarter century.”
Significant improvements in “technology in recent years, while making existing natural gas reserves stretch further, have been unable, in the face of inexorably rising demand, to keep the underlying long-term price for natural gas in the United States from rising,” Greenspan said.
Gas prices have been “inherently far more volatile than oil, doubtless reflecting, in part, less-developed, price-dampening global trade.” He believes greater U.S. access to LNG, which currently accounts for only 2% of domestic gas mix, will help to moderate runaway prices.
“High natural gas prices projected by distant futures prices have made imported gas a more attractive option for us…If North American natural gas markets are to function with the flexibility exhibited by oil, more extensive access to the vast world reserves of gas is required,” according to Greenspan. He said this will require a major expansion of LNG terminal import capacity and the development of newer offshore regasification technologies.
Noting that such an expansion appears already to be under way, Greenspan said “these movements bode well for widespread natural gas availability in North America in the next decade and beyond.” However, “the near term…is apt to continue to be challenging.”
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