Federal Reserve Chairman Alan Greenspan on Thursday fine-tuned his message on liquefied natural gas (LNG) in his second appearance before Congress in less than a month, saying that the United States at a minimum ought to have a “standby LNG system” in place to lessen price volatility in the domestic gas market. But he signaled that the nation should work in the longer term to eliminate it as a back-up by producing “far more” domestic gas supplies.

If the U.S. is unsuccessful in resolving long-standing environmental conflicts so that producers can expand gas supplies, then LNG would assume a more prominent supply role — it would become the “ultimate safety valve” for the country, Greenspan said during an oversight hearing of the Senate Energy and Natural Resources Committee examining the gas supply shortfall and above-normal prices. “That doesn’t mean we need to have a significant base of LNG as a fundamental source of supply,” he noted.

“We have not exhibited in this country an obvious success in resolving these problems…Rather than say we shall do it, I think that it would be far more sensible to assure ourselves at a minimum a back-up [LNG system] which would provide us [with supplies]…as we need, and hope that that need is de minimis,” he told senators.

Personally, “I would prefer that we not increase imports of natural gas,” Greenspan noted. “I would much prefer that we meet domestic consumption [effectively with] North American production. I regret to say the problems that are emerging on endeavoring to do that suggest that we may be using LNG for more than just price stability. We may be using it for base supply of natural gas in the years ahead, unless we can find [some] means to create a U.S. source for gas.”

The chairman’s comments hit a nerve with the Interstate Oil and Gas Compact Commission (IOGCC), which represents the governors of 30 oil and gas producing states, and gas producers. “Before we embrace foreign natural gas, other than from Canada, let’s look first at how we can produce our existing supplies of natural gas,” said the IOGCC.

Greenspan agreed with Committee Chairman Pete Domenici (R-NM) that little can be done in the near term, short of demand-reduction measures, to soften the blow of a gas supply and price crisis this winter. “I’m not aware of any short-term expedients that can be employed at this stage to significantly alter the path that will occur on prices over the next 6 to 9 months, or a year,” he said.

Domenici said gas prices could range anywhere from $4.50/Mcf to $9/Mcf this winter. In the short term, “there is not [much] the government can do to [change] that price by more than 25 cents in either direction.” In the longer term, he favors diversifying the nation’s fuel mix, and expanding domestic gas production and LNG imports.

Residential gas consumers “are going to clearly see significantly higher bills” this winter if the futures market is correct in its forecasts for spot prices in the months ahead, according to Greenspan. Asked if Congress should consider offering tax relief to gas consumers, he cautioned that it could backfire and cause consumers to “abort” measures to conserve energy.

As for the economy as a whole, he said the damage caused by high gas prices so far has been “quite minimal.” He doesn’t see the aggregate manufacturing sector being “significantly affected,” but he noted some gas-intensive businesses (such as fertilizer companies) are moving operations overseas and profit margins are being squeezed. “As yet, the effect has been containable,” Greenspan told Senate lawmakers, but this could change in the long term.

Domenici said current gas market conditions underscore the need for the Senate to pass a comprehensive energy bill soon. He said the Senate will take up the legislation the last week before it is due to leave for August recess, and may stay in session until it is passed.

Greenspan quickly dispelled the suggestion the current gas prices, which are above $5/Mcf, may be due to manipulation in the market. The prices “can be fully explained by the relative balance of supply and demand.” He conceded that manipulation is oftentimes difficult to “ferret out,” but he noted the vast number of people who try to manipulate the market “do indeed fail.”

He also doubted that the low confidence in the scandal-ridden energy industry and receding number of traders have had much affect on the market. “It [has] likely been ‘a’ problem,” but it’s “unquestionably quite small.”

When it comes to drilling for natural gas, Greenspan noted the U.S. is confronted with a “very unusual situation” involving a clash between two value systems — one being economic (favoring drilling) and the other being environmental (opposed to drilling). He believes the situation requires a “very difficult, but necessary tradeoff,” a decision that can only be made by Congress.

Greenspan said he favors an Alaska gas pipeline and LNG deliveries by Alaska to the Lower 48 states. “Unquestionably, the more gas we get down to the Lower 48 the better.” But he opposed federal government subsidies to build the line, noting that $4 gas in the long term should be an adequate incentive for producers.

He agreed that the federal government’s emphasis on gas to fuel power generation has “certainly” pushed up gas prices over the years. Absent this action, “there’s no question that the domestic price for natural gas would be lower than it is today.” If the government would promote greater fuel diversity for generation, this “[would] take a good deal of pressure off of gas,” Greenspan noted.

Domenici echoed that sentiment, noting that gas-fired power generation plants now account for 88% of all new generation facilities constructed in the United States.

Greenspan also cautioned senators about creating new or undoing old regulations to address the gas situation. Lawmakers may enact “regulation X that solves problem X, but [it] creates problem Y.”

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