New Cartel Announces the End of Cheap Gas 12 comments
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We are familiar with OPEC and the effects they have had on the price of oil over the years. The OPEC nations meet on a regular basis to decide how much oil they will allow the rest of the world to have from their stores. They set quotas and limits on production in an attempt, they say, to keep the price steady at a level that is good for both consumers and the producers. We've seen how that works. Fortunately, many of the producers balk at reducing output and have a tendency to cheat, producing more than their allocation. Now, we are witnessing the formation of a new cartel, this time of producers of natural gas.
Natural gas is used widely in Europe and Asia for heat, as it is here in the US. Last week, a consortium of natural gas producers met in Moscow. The goal of the meeting was to establish an OPEC-like cartel of gas producers who would control output. Although the meetings participants were quick to say that they do not intend to engage in price fixing, the keynote speaker, none other than Vladimir Putin, said "...despite the current problems in finances the era of cheap energy resources, of cheap gas, is of course coming to an end."
Russia is no stranger to throttling gas supplies in order to negotiate better prices. The Republic of Georgia can bear witness to that fact, having had their entire supply of Russian gas, which is used for heating homes there, cut off in the middle of the freezing winter. Now that winter is here again Russia is turning up the heat on the Ukraine by turning off their heat as well. Coincidentally, prior to Russia cutting off their gas, both Georgia and the Ukraine were actively courting the United States and have begun steps toward joining NATO.
This makes the Russian bear and Vladimir Putin, in particular, very upset. The threat to the gas supply in Europe (which passes through the Ukraine via pipeline) has already caused a noticeable spike in oil prices. Keep your eye on the price at the pump and don't be surprised to see it climb a little bit. It shouldn't be anything like the $4/ gallon we saw in 2008, but the downward trend is likely to stop and reverse until the Ukraine gives in to Russian demands and the gas flows unimpeded again.
With a strong Russian leadership in a natural gas cartel, then, would we expect that policies and supplies would be formed without political motivation? Or would we expect, as Russia's recent actions with both Georgia and the Ukraine have shown, that gas supply would become a weapon to be used to help dictate trading and military policy to the European Union and other US allies? I'd bet on the latter.
As for the US, we need only take Putin at his word that gas prices will increase dramatically. Although the US is a major gas producer as well, global prices will dictate US domestic prices to a large extent. If you are considering converting to natural gas heat, think twice. If the new cartel has its way, it may not seem like such a good idea in the not too distant future. On the other hand, renewable energy sources such as wind and solar are much harder to monopolize and as prices for other forms of energy continue to rise, green energy will not only become more competitive, but will help provide stable energy prices that are too a large degree immune from artificial supply constraints devised by foreign cartels to drive up the price.
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This article has 12 comments:
Also..again sorry..but nat gas is stil very much a regional (local) fuel. It costs very different amounts in very different places because its not so easy to move around. Just a little remonder also..people may not like those nasty Russians..but the gas IS theirs..just a minor point.
Russia makes it's social unrest controlable at Oil above 100$ and all it's commodities 100% above the curent prices, I expect something terrible will happen in Russia very soon and it will make Oil/Gas cheaper as they are scrambling and begging to sell their hard stuff for dollars.
Our domestic price of natural gas is not likely to be influenced by any Russian cartel. Our supply is virtually all domestic and Canadian. What little we import is in the form of LNG, which is brought in to "backfeed" the piping systems because of pipeline capacity limitations.
There is no reason to expect a supply deficiency in the near future. In fact the domestic suppliers such as Chesapeak are curtailing 2009 production.
CEO who can treat both investors and the gov't as patsies?
North American gas production is divided between conventional and unconventional. Conventional peaked in 2001 and is in serious decline. The only thing that has been saving us from a gas debacle is the new shale and other unconventional plays, which are ramping up nicely. The problem with this new gas is that it's very drilling intensive. Between that and the higher drilling activity needed to get gas from declining conventional fields, gas drilling is going hyperbolic just to keep production flat. The American Petroleum Institute reported yesterday that domestic gas drilling cost for 2007 was up 105% over the previous record (2006). It's an accelerating treadmill that the gas producers are on. If anything were to happen to the new drilling efforts, the decline in production would be dramatic.
Well guess what? Something HAS happened to these efforts. It's called the credit crunch! Drilling runs on debt to a large extent, and that fuel has dried up.
Speaking of fools, a few months ago the US Ambassador to Sweden attempted to convince his hosts that Russia was launching some kind of imperialistic rampage where energy is concerned. What His Excellency convinced me of however was that it is a mistake to talk about things that neither you nor your advisors know anything about. He was concerned about the new Russian pipelines to Europe, but what he doesn't understand is that the Russians have the option of constructing them so that they run to China.
Incidentally, half of the last paragraph in this article needs to be read several times and thought about. What does not need to be read is the part about wind and solar. These items are important and more of them are needed, but they are definitely on the second (or third) team where energy is concerned.