Nearly everyone you talk to in the gas industry today believes there’s a gas supply problem and that gas prices are going to remain high or even continue rising. James Allison, regional risk manager for ConocoPhillips, said he too sees a supply problem and higher prices, but he also said there’s a pretty good chance that everyone is wrong.

In a presentation at GasMart 2004 in Denver last week, Allison said that according to his own calculations, the gas supply bubble burst sometime around 2002 and has been gone ever since.

“The U.S. gas market is somewhere between 60 and 65 Bcf/d. Once upon a time back in 1995 we had some spare [production] capacity. It was only about 5% of the market, but there was some spare capacity,” Allison noted. “By 2002, that spare capacity was gone. So the gas bubble that I heard about at least twice a year [in the 1990s] seems to have finally disappeared.”

That has set the stage for huge levels of price volatility and spikes, Allison noted. Prices have shown no signs of getting much weaker. Even the gas futures contracts all the way out in 2010 are still priced at $4.75/MMBtu.

“However, there is one question that I’ll leave you with,” he said. “I’ve been in the oil business for a little over 20 years now. From time to time, all of the so called experts have aligned on the same side of some issue or another. This appears to be one such time. All of us are aligning on the view that high prices are here to stay for a while.

“Every other time all the experts have lined up the same way, we’ve been wrong,” said Allison. “So there is that warning note out there. I don’t know why we might be wrong this time, but a degree of humility is in order. We have been so good at being wrong when we’ve agreed with each other that we should consider the possibility this time.”

Allison said that one thing that may end up proving everyone wrong is demand destruction. If gas prices continue higher, they will kill off too much demand, and then “we will have solved the problem of excess capacity,” he said. “We will have recreated excess capacity, not in ways that are healthy for the industry.”

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