Not Just Oil

Right now the primary energy focus of the post-Katrina recovery is on the refineries that produce 10% of our gasoline, diesel/heating oil, and other petroleum products. At the same time, companies are scrambling to find enough crude oil to supply these facilities, once they restart, since a sizeable fraction of Gulf of Mexico crude oil production--a quarter of all domestic oil production--will be offline for some time. But a growing number of analysts are beginning to realize the implications of Katrina for natural gas markets, as described by today's Financial Times (subscription required.) We are in for a serious crunch, and the extraordinarily high gas prices on the futures market underline this view.

For some time, I have expressed concern that we are headed for a train wreck with regard to natural gas. Gas is our cleanest fossil fuel, and its consumption has grown rapidly as the preferred fuel for generating electricity most efficiently, with low emissions of all types, including greenhouse gases. Unfortunately, our supply of conventional natural gas has hit a stall point, for several reasons:

• The natural decline rates of mature offshore gas fields have exceeded expectations. In other words, existing wells in these fields are slowing down faster than new wells can be drilled, and the new wells lose productivity faster than in the past.
• Vast quantities of previously discovered gas have been placed off-limits by land-use restrictions and by offshore drilling bans that fail to differentiate between oil and non-associated gas deposits (i.e., gas not found in oil fields.)
• Imports from Canada face competition from growing Canadian demand, including demand for the gas required to fuel oil sands extraction projects in Northern Alberta.
• Imports of LNG have topped out at existing facilities, and construction of new import terminals has been impeded by permitting problems and blatant NIMBY-ism.

These trends were all in place before the hurricane hit. Now, with roughly 20% of US natural gas production out of action during the period in which gas must be injected into storage for use during the winter heating season, all remaining slack in the system has been eliminated, and we will face hard choices within a few months. Nor are there any policy decisions--including easing some of the post-9/11 shipping restrictions that have limited LNG imports at Cabot's Everett, MA facility--that could change this picture materially in time for the cold weather.

Instead, we are likely to see an acceleration of the existing response mechanisms, with domestic demand destruction filling in for expanded supply. That means shifting more power generation onto coal-fired plants, with the accompanying increases in emissions. We will also see beleaguered industrial users, particularly fertilizer and petrochemical producers that were already losing the competitive battle against imports from countries with cheaper gas, selling their long-term supplies back into the market and shutting down capacity. That will result in lost jobs and lost GDP.

Some of this would have been unavoidable, but much of it must be attributed not to Katrina--which merely exposed the flaws--but to years of bad policy decisions that have hobbled the fuel that was our primary safety valve during the previous energy crisis. Prompt action to rectify these policy faults, some of which were partially addressed in the recent Energy Bill, could put us in a much better position for the winter of 2006-2007. Meanwhile, it is not too early for us all to start cutting back on our natural gas consumption by reducing electricity use and keeping heater thermostats a couple of degrees lower than normal. That way, a few more cubic feet might find their way into storage, for use when we will really need them in January and February.