Summary
The cited Blomberg article blames mainly speculators for the dramatic rise of oil and gas prices within one year. Oil rose according to Blomberg 90% and gas 48%, both referenced to the New York Mercantile Exchange. Of course the speculators are investing in oil and gas as long as the dollar is weak.
Analysis
The rise of oil and gas prices is not just the result of commodity speculators but also due to the real shortage of natural gas (NG) and geopolitical realities of the global oil business.
The energy community has known for over ten years that the NG supply in the US fields is declining and the continuously increasing NG demand has to be covered by NG imports from Canada and LNG imports from global sources. As a matter of fact increased power demand can presently by law only be covered by the construction of NG fired combined cycle power plants. Coal fired plants are put on hold until the carbon issues have been convincingly settled. The increased NG demand certainly drives up the NG prices to a point where global LNG will land at the existing East Coast LNG terminals as well as at Lake Charles and the numerous LNG terminals being constructed on the Gulf Coast.
Due to higher LNG prices paid for by Japan, Korea, China and European countries, in particular Spain, the LNG import to the US may be less than 2.5 billion cubic feet per day. However, we really need according to an ExxonMobil study ten times this amount in the future.
The price of NG will further increase until
• NG exploration - such as for example conducted by ExxonMobil in Colorado and by numerous independent exploration companies in other locations - becomes successful
• Alaskan NG is brought down to the Mid West and/or as LNG to the West Coast and maybe with opening of the North West Passage also to the East Coast
• Public learns to understand the outstanding safety record of LNG and starts to appreciate this valuable and environmentally desired energy resource
• Sufficient investment in NG and LNG projects have been made to get our NG energy demands into balance
Oil prices will not decrease until
• The dollar strengthens due to sound and disciplined economics in the US and other countries
• OPEC is forced to lower the oil price due to serious and accelerated alternative energy developments in the US such as nuclear power and clean coal CTL, SNG and IGCC
In summary the increased oil and gas prices are a blessing in disguise to force the hand of Congress to stabilize the dollar and heavily invest in national oil and gas projects and forget about misconceived tax increases for the oil and gas industry.
Hans Linhardt consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
