I thought you should know about natural gas and other energy sources

Monday, March 10, 2008

A analysis by Kay Schindel:

The current global and US commodity market situation makes it necessary to share these news [items] with you.

Despite recession and curbed fuel demand, energy prices have been steadily going up. Oil traded at $ 108/barrel today while the 2007 average was at around $75. Natural gas traded at $10/MMBtu today ($ 7.50 in 3/07), according to Bloomberg. Since utilities lock prices for several months this won't have much impact on current energy bills. However, it will have an impact later this year.

The impact of the oil price you can see when you drive by a gas station. Similarly important is the natural gas situation. Traditionally the US has been importing natural gas from Canada and Mexico, which have seen increased demand and declining production themselves. The North-American production gap is made up with imported Liquefied Natural Gas (LNG). LNG is imported from regions with a surplus of natural gas. Mostly Russia and the Middle East. The percentage of US natural gas consumption is steadily climbing due to declining home-production and increasing demand. This causes three serious problems. Cost is the obvious one with much energy needed to liquefy natural gas at -260°F, to build terminals in both the US and the producer country, and to run LNG tankers.

Logistics and security is another problem since no US harbor community wants to have an LNG facility in their backyard and an LNG tanker can cause an explosion similar to a small sized nuclear bomb. There also is the problem of time since it takes some time to plan and finally commission an LNG facility. Currently there are 16 LNG facilities operating in the US and 40 more are planned as of now. However, due to future global shortage of natural gas and the lack of exporting countries, not all projects might happen.

The third problem is independence. Russia has been using, and is continuing to do so, cuts in delivery to negotiate prices and other political issues. It also is moving away from being a democracy. The Middle East as the other LNG supplier is not less difficult to deal with.

What implication does that have to us? Natural gas is the major heat fuel source (LPG is a natural gas byproduct) and traditionally has been cheaper and cleaner than coal and oil. Most of the recently installed electric power generation is firing natural gas, and many future installations will use natural gas due to its cleaner combustion compared to coal. Therefore, there will be an impact on heating AND electricity prices.

In 2002 Alan Greenspan already realized that "tight natural gas supplies present an extremely serious problem".

As predicted often in the past, the producing countries will exhaust their reserves and will have to cut exports to meet domestic demand. This prediction is materializing more and more and is becoming a market reality today.

This applies to other fuels as well. China became a net coal importer in 2007, The UK stopped exporting natural gas and is importing now,...

The nuclear fuel situation is even worse. At current consumption the world wide supply will last less than 60 years and only 7% of the reserves are in the US. There might be a trend to build more nukes, which will shorten the supply to much less than 60 years.

In addition to worldwide shortage of fuel, it will become more expensive (and energy consuming) to explore and mine commodities assuming "easy to get" commodities have been exploited first.

Another worrisome market trend, that will affect poor nations more than us, is that rising demand for fuel increases food production cost and diverts more food crops to biofuel production. The last year has seen 40%-70% increases in raw food material corn, wheat etc.).

I thought you should know.