Oil shock: Natural Gas : Danger Signs


Richard Moore


Natural Gas's Danger Signs 
Higher Costs Threaten Economic Growth, U.S. Manufacturing 

By Justin Blum 
Washington Post Staff Writer 
Friday, October 7, 2005; D01 

Soaring natural gas prices threaten to propel winter heating
bills sharply higher, slow economic growth and push
manufacturers overseas.

U.S. consumers could face bills averaging 48 percent higher
this season than last year, according to predictions by the
economic research firm Global Insight Inc. The escalating
costs could cause Americans to cut back on dinners out, trips
to the mall and spending, crimping U.S. economic growth.
Businesses, squeezed by high energy costs, could limit
expansion plans. The high prices also are pumping up

Manufacturers that use huge amounts of natural gas are
scouring the world for cheaper prices and considering moving
operations to ease their costs. A renewed exodus -- many
companies have already shifted overseas -- could further knock
back growth in the United States and boost unemployment.

Andrew N. Liveris, chief executive of Dow Chemical Co., told a
hearing yesterday before the Senate Energy and Natural
Resources Committee that the country is in a "natural gas
crisis." The Midland, Mich., company, which uses large amounts
of the fuel to produce chemicals, must consider locating new
plants in other parts of the world, such as China and the
Middle East, because of U.S. energy costs, he said.

"How can I recommend investing here?" Liveris said.

U.S. natural gas prices are among the highest in the world.
Though the United States imports some natural gas, most is
produced domestically. But supplies have failed to keep pace
with demand.

Power plants have increasingly turned to natural gas for fuel
over the past decade because it is cleaner-burning than coal.
About 17 percent of the country's electricity is generated by
natural gas, according to government data. Natural gas
accounts for about 63 percent of energy consumed in U.S.
households. The fuel heats 55 percent of the country's homes.

U.S. natural gas prices have been edging higher for years and
shot up sharply in recent weeks because of hurricanes Rita and
Katrina, which damaged production in the Gulf of Mexico along
with onshore processing facilities.

Imports are not able to make up for the lost supplies -- as
they have for oil and gasoline -- because not enough liquefied
natural gas is available. Too few ships and terminals exist to
handle a significant increase in imports. Domestic production,
which has been flat in recent years, cannot be quickly
increased without significantly more drilling, analysts said.

"There is justification for concern about natural gas prices
at these levels," said Jason Schenker, an economist with
Wachovia Corp. in Charlotte. "Prices now are essentially twice
what they were last winter. That's likely to squeeze

The cost to heat homes with natural gas could increase about
$500 this winter compared with last year, according to Global
Insight in Lexington, Mass.

In the D.C. area, officials with Washington Gas forecast that
consumer bills could jump as much as 32 percent compared with
a year ago. The company said it put large amounts of natural
gas in storage over the summer, when prices were slightly
lower, which will help hold down prices a bit. Costs could
increase if the winter is unusually cold and demand increases,
company officials said.

The price of natural gas for November delivery closed at
$13.38 per million British thermal units (Btu) yesterday on
the New York Mercantile Exchange. That was up 90 percent from
a year ago. Analysts expect prices to fall somewhat after
hurricane-related repairs are completed in the Gulf.

Prices in the largest producing countries -- such as Algeria,
Qatar and Nigeria -- are sharply lower than those in the
United States -- below $1 per million Btu, analysts said. In
some European countries, natural gas sells for about half the
U.S. price.

Unlike crude oil, whose price is set on a world market,
natural gas prices are set in local markets. In countries
where supplies are abundant, prices tend to be lower.

Rising prices are generating concern on Capitol Hill and are
increasing pressure on lawmakers to open drilling areas that
are now off limits. A measure approved by the House Resources
Committee last week would allow drilling for natural gas
offshore on the Outer Continental Shelf.

Lawmakers who support the measure said momentum is building
after years of failed attempts. "I have a lot of members
saying . . . 'I'm seriously thinking of switching to your
side,' " said Rep. John E. Peterson (R-Pa.)

The Washington-based National Association of Manufacturers and
the Arlington-based American Chemistry Council, which
represents the chemical industry, have been pushing for more
domestic production. Businesses small and large have been
making their case to members of Congress that something needs
to be done about natural gas prices.

Peterson, whose district includes manufacturers of brick and
asphalt, said, "There's just no way that business can absorb

Environmentalists are seizing on higher prices as evidence of
a need for conservation. They are calling for more strict
requirements for appliances that use natural gas and for
housing insulation. They also want tax breaks to encourage
consumers to buy more efficient appliances.

"We just don't have enough natural gas out there to meet our
long-term needs," said Karen Wayland, the Washington-based
legislative director of the Natural Resources Defense Council,
an environmental group. "The only answer, especially in the
short term, is energy efficiency."

Chemical industry officials are warning that more plants will
shut operation in the United States and relocate. "They're
saying, 'Okay, we have a budget of a billion dollars we're
going to invest in production. Where's the best place to do
it?' " said Owen Kean, senior policy adviser for the chemistry
council. "Increasingly they're making the decisions to do it
someplace else."

The United States has five terminals where liquefied natural
gas can be imported, and a number of additional facilities
have been proposed or approved. A number of major projects
around the world are underway that will produce liquefied
natural gas. Analysts said that in the future, the country
will become more reliant on imports, which eventually could
help to moderate prices.

But in the meantime, companies that import liquefied natural
gas have been struggling to obtain more. Most of the supply is
locked up in long-term contracts, and companies that sometimes
have extra have been suffering production problems.

"That's kind of dried up what would normally be excess
production available for spot delivery," said Jane Michalek, a
vice president with Suez LNG of North America. "There's not a
lot of excess production out there right now."

© 2005 The Washington Post Company 


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