The $4 Floor

Although it hasn't garnered the headlines that have accompanied the recent drop in gasoline prices, the decline in the natural gas market has been even more precipitous. If it's not getting much attention in the media, it was certainly a key topic at the industry conference I'm attending. In the last month, the futures price for natural gas for October delivery at the Henry Hub in Louisiana has declined from about $7/million BTUs to $4.20, the lowest such price since December 2002. As a result, one US gas producer announced today that it would shut in 6% of its production, which presumably costs more than the current price to produce. That piece of news is indicative of the underlying shifts that have occurred in the US natural gas industry, without much fanfare.

After last year's hurricanes, natural gas prices zoomed over $10/MMBTU, rising steadily to reach $15 in early December 2005. If we look back only a few years earlier, however, gas routinely traded in the $2-$3 range, making the spike in natural gas prices at least as dramatic as what we've seen for crude oil. Anyone hoping to see those levels again would have to bank on a major expansion of low-cost domestic supply, and that is just not in the cards. As I heard in several presentations today, an increasing proportion of our future domestic gas supply will come from wells in deep water and from so-called unconventional gas resources, such as shale formations, coal beds, and other higher-cost sources. The domestic industry's price structure has changed permanently, because there is no longer enough cheap gas available here or in Canada to meet our growing demand. LNG can provide us with significant new supplies, if we build enough infrastructure to receive it, but its delivered cost will not be less than $4, either.

For individual consumers, this may all seem a bit moot. Even if prices rise in the next few weeks to the levels that the futures market currently reflects for winter delivery, around $7, this will still provide significant relief compared with last year. But for manufacturers that have been shutting down facilities and re-selling their gas supplies, because they can't make money when gas is four to six times higher than their imported competition pays, the best they can hope for is a floor price that is still twice what it was in the 1990s. We'll have to see if that is low enough to keep most of our gas-derived fertilizer and

petrochemical industry from moving offshore.