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SCIENTECH IssueAlert, October 9, 2000
Oil and Natural-Gas Shortages: Will They Create a Winter of Discontent?
By: Will McNamara, Director, Electric Industry Analysis
===============================================================

U.S. retail energy fuel costs, already high by historical standards, are
expected to remain high this winter due to crude prices that are projected
to remain at levels unseen since the Gulf War, said the Department of Energy
on Friday. In addition, households that use natural gas are likely to see
the largest year-on-year percentage increase in their bills as well, according
to the Energy Information Administration (EIA). The agency said U.S. residents
can expect heating expenditures to increase by 25 percent for heating oil
and propane and 40 percent for natural gas.

ANALYSIS: Despite common belief to the contrary, there is a direct correlation
between the price cycles of oil and natural gas. The fact that there are
legitimate concerns surrounding the availability of both power sources
gives validity to the warnings of price increases this winter. When fuel
prices are low and natural-gas supplies are abundant, there is arguably
little connection between the two. However, the present situation as we
head into winter is the exact opposite*high oil prices and a comprised
supply of natural gas, leaving the two unquestionably intertwined. As energy
users opt to switch from oil to natural gas, this affects natural gas supply
and raises gas prices.

How did we arrive at this alarming situation, which may have been justifiably
labeled an "energy crisis"? Regarding oil, in 1998 the worldwide oil industry
witnessed a decline in oil prices*spawned in part by the economic problems
in Asia*which hit a low of less than $10 a barrel in March 1998. Oil producers
voluntarily initiated decreased production, which unsurprisingly started
a swift climb in prices in 1999, as demand started to increase in a 
rejuvenated
Asia and the United States. Together, this has created a volatile mix of
substantially higher crude oil prices, lower inventories and increased
demand. Even though OPEC has made promises of up to 1.1 million additional
barrels of crude oil per day*a result of political pressure put on it by
the United States and other countries*it may not be able to force its members
to increase production, as obviously it's in the best interest of oil 
producers
to keep supplies tight and prices high. In addition, even if they materialize,
these increases promised by OPEC may not be enough to meet growing demand.
This is alarming as the United States is very reliant on foreign oil, which
already accounts for about half of U.S. oil use.

The high price of oil has sent many customers looking for natural gas,
only to find that it is also in questionable supply. Most reports suggest
that natural gas heats about 55 percent of all U.S. homes. The imbalance
between supply and demand found in the oil industry is also found in natural
gas, resulting in a projected 20 to 40 percent increase in heating bills
this winter. Over the last month, prices for natural-gas futures have climbed
to record levels of more than $5 per million Btus. Yet, unlike oil, most
of the blame placed on low supply for natural gas focuses on the United
States rather than other countries. A reported 60 percent of federal lands
have been placed off limits to natural-gas drillers, leaving as many as
200 million acres (out of a total of 1.5 billion) available but restricted
for natural-gas expansion. The Clinton administration and environmental
groups have been fiercely protective of federal reserve lands and prohibited
drilling for natural gas (or oil) in states like Alaska, where some 36
trillion cubic feet of gas is known to be locked underground. At the same
time, EPA standards have become so pro-natural gas over the last decade
that few coal-fired plants have been built in the last 10-20 years, placing
an increasingly high dependence on natural gas, even though alternative
fuels are not necessarily available to serve as a substitute.

Given the connection between oil and natural gas, any successful attempt
to lower oil prices would in turn help to lower natural-gas prices. The
ability to rely more heavily on oil once again would decrease the need
for fuel switching, thus reducing the present burden on natural gas. Toward
this end, in late September President Clinton authorized the release of
30 million barrels of crude oil from the U.S. Strategic Petroleum Reserve
(SPR), the nation's emergency oil stockpile. The president's action caused
additional alarm in some groups who said that the need to tap into emergency
supplies so early in the season signaled real trouble with oil supplies.
Others said the 30 million barrels would do little to ease the problem,
and that it would take between 2 and 3 million barrels a day for one month
to reduce current crude oil prices.

So what is the solution? As noted, the issue has become politically polarized.
Within their campaign proposals, Gov. Bush proposes spending $7.1 billion
to open up U.S. energy resources and reduce dependence on foreign sources.
Specifically, Bush has proposed, among other things, opening 8 percent
of the Arctic National Wildlife Range, which probably contains about 10
billion barrels of oil. Vice President Gore opposes drilling in federal
land, and instead aims to protect the U.S. environment, increase reliance
on low-pollution fuels and focus on energy-efficiency / lower consumption
programs. Articulating the Democratic position on this issue, Senator Joe
Lieberman made the following comments last week in the vice presidential
debate: "There are more resources within the United States. If we can get
three miles more per gallon from our cars, we'll get a million*we'll save
a million barrels of oil a day, which is exactly what the refuge, at its
best, in Alaska, would produce(We've got to develop fuel cells, alternative
energy. We've got to encourage people to conserve..."

But what is the answer now, as winter fast approaches? Unfortunately, natural
gas has no emergency fund like the SPR which it can tap into. The degree
to which the oil/gas supply issue will have a dramatic impact this winter
will depend on the weather. The colder the temperature, the greater the
need for heating power sources, which will drive up the cost for both oil
and natural gas. Meteorologists are predicting a tough winter, one that
in actuality may be near normal but will seem colder after the four past
winters, which were unusually mild due to La Nia. Already, temperatures
are dipping to surprising lows across the country. Considering that it
is only early October, warnings are continuing to accumulate that supply
will be stretched to meet demand, which unquestionably will drive up the
price of energy bills.

Looking forward, much of what happens from here will depend on which candidate
is elected in November. Most within the energy industry agree that more
production is the only answer to supply concerns. Yet, expanding production
will not be an easy task, especially in an election year. This is not an
issue that is gaining high priority within Congress, as politicians aim
to end their session before the presidential election. With such exceedingly
opposed candidates, the impact that the imminent election will have on
future energy policy cannot be underestimated.

==============================================================

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Sincerely,

Will McNamara
Director, Electric Industry Analysis
wmcnamara@scientech.com
===============================================================
Feedback regarding SCIENTECH's IssueAlert should be sent to 
wmcnamara@scientech.com
===============================================================

SCIENTECH's IssueAlerts are compiled based on independent analysis by 
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