“We’re out of gas!” says Chairman Greenspan. Natural gas, that is. Earlier this month, Greenspan appeared before a Senate committee, as he often does. But on this particular visit, the maestro of monetary policy did not discuss the stalled economy or the record low interest rates that his Fed has engineered. Instead, he talked about the nation’s looming natural gas shortage. And for once, he’s right.
“Today’s tight natural gas markets have been a long time in coming,” Greenspan observed, “and distant futures prices suggest that we are not apt to return to earlier periods of relative abundance and low prices anytime soon.”
In his testimony, Greenspan pointed out that the market – the best of our admittedly imperfect future predictors – is indicating high and rising methane prices throughout the decade. “The long-term equilibrium price for natural gas in the United States has risen persistently during the past six years from approximately $2 per million Btu to more than $4.50. Although futures markets project a near-term modest price decline from current highly elevated levels, contracts written for delivery in 2009 are more than double the levels that had been contemplated when much of our existing gas-using capital stock was put in place.”
Because the United States imports 53% of its crude oil (compared to 35% during the oil embargo of 1973), the country relies increasingly on natural gas to supply its energy needs.
Canadian Methane: The Ugly Stepchild
According to the July 21st edition of Time: “Crude oil is winding down. The last nuclear power plant was ordered in July 1973. No meaningful alternative fuels exist. In short, Americans are heading toward their first major energy crunch since the 1970s.” Therefore, natural gas will play an increasingly important role in satisfying U.S. energy needs.
But it hasn’t always been this way. In 1962, methane gas was considered a nuisance, not a collectable resource. Back then, gas was the ugly stepchild of the petroleum family – a safety hazard with no market value. Drillers cursed when they found it. In North America, gas sold for 30¢ per thousand cubic feet as recently as 1974.
But as the demand for energy surged in North America, the U.S. began to discover fewer and fewer rich oil wells. Meanwhile, companies began to consider the applications for natural gas. In short order, excess methane gas was not only being captured, but companies began to drill for it, routing production directly from the well into pipelines.
Today, natural gas is delivered to about 175 million American consumers through a 1.3 million-mile network of underground pipe. There are nearly half a million wells in North America producing natural gas.
Canadian Methane: Running Dry
One of the most valuable advantages of natural gas is that its supply cannot be disrupted by wars or embargoes. While the United States imports half of its oil supplies, a whopping 88 percent of the natural gas it consumes is produced domestically, while the remaining balance is imported from Canada via pipeline.
Unfortunately, many of the natural gas wells in the United States are beginning to run dry. A few years ago the Oil & Gas Journal published a wake-up article, detailing how Texas – which produces one-third of the nation’s gas – must drill 6,400 new wells each year to keep its production from plummeting. That’s a rate of 17 new wells every day. By comparison, a few years before, Texas was drilling just 4,000 wells to keep production steady.
This drastic falloff in production has occurred as drillers must drill smaller pools, which deplete much more quickly than their larger cousins. Today, new pools in Texas have become so small that after just one year of production, more than half the pool has been depleted. As U.S. domestic production continues to taper, more and more eyes are turning towards the reserves hidden in Canada.
According to the Oil & Gas Journal, the influx of Canadian natural gas into U.S. markets will steadily rise over the next several years. The WSOB, one of Canada’s most attractive oil and gas basins, has over 200 Tcf of gas reserves – making it the largest basin in North America. It is still relatively immature, with a much lower well density than the over-drilled basins in the lower 48 states. In fact, only 25 percent of estimated reserves have been exploited in Canada, compared with 45 percent in the continental United States. This sets up windfall potential for Canadian petroleum companies and the shareholders who develop them.
Canadian Methane: More and More Methane
Even conservative investors can’t help but salivate at the rampant growth of Canada’s natural gas markets. In 2000, a total of 5,500 gas wells were drilled in the WSOB. In 2001, 7,700 wells were drilled. Even with all this activity, geologists estimate that two-thirds of the WSOB’s gas reserves have yet to be unlocked.
The expectation is that more and more Canadian methane will be used to quench America’s abundant thirst for energy.
Speaking at a natural gas conference on June 26th, Secretary of Energy Spencer Abraham suggested Congress should “help spur domestic production of natural gas and enhance our importation facilities to boost supplies, while reducing our nation’s growing over-reliance on this one source of energy.”
Also speaking at the conference, Cambridge Energy Research Associates Chairman Daniel Yergin said a hot summer could trigger higher gas prices. “Every recession since the early 1970s has been associated with spikes in energy prices,” Yergin said. “The problem now isn’t market failure, but disappointing drilling results, restrictions on exploration and a shift to new uses of natural gas that will certainly raise consumption,” he said.
The natural gas market is just beginning to heat up…and as anyone who has worked around methane knows, heat can cause an explosive situation.
Yours for energy profits,
for the Daily Reckoning
July 30, 2003
What have we become, dear reader?
The ‘world’s mouth.’ That is what the Dollar Standard has made us.
It tempts us to gobble up the world’s goods and services – believing we’ll never really have to pay for them. We’ve become the consumers of first and last resort. Our people are besotted by it. And our economists have gone a little goofy.
We heard from one member of the profession, recently, who explained that consumption was the very definition of wealth. What was prosperity, he wanted to know, but the ability to consume?
We don’t believe it. It is not the ability to consume that defines a rich man, but his ability to produce. And while the Dollar Standard lured the mouth to consume, it encouraged the rest of the world to bulk up its production. Americans end up with the flabby detritus of modern life – broken VCRs, gas-guzzling SUVs, mortgages and empty champagne bottles – while China adds more jobs, factories, and savings!
Daily Reckoning readers may be getting tired of hearing us say this, but we have not yet gotten tired of saying it: nothing is as dangerous as good luck. America had the extraordinary luck to have its own money taken up as the world’s reserve currency. Now, it is being ruined by its own good fortune.
Over to Eric Fry on Wall Street. If America is the world’s mouth, Eric must be right there on the beguiling, seductive, sensuous lips…
Eric Fry, checking in from Manhattan…
– What has become of the intrepid American consumer? Is he losing his nerve? Whatever happened to that cocksure fellow who never hesitated to spend money he didn’t have on things he didn’t need? And where is the bravado that inspired him to squeeze every last drop of equity out of his house in order to buy snowmobiles, gourmet tequila and overvalued tech stocks?
– The consumer is still with us, of course, but his confidence is waning a bit. The Conference Board’s Consumer Confidence Index fell to 76.6 in July from 83.5 in June – it’s the lowest level since March’s 61.4.
– “The rising level of unemployment and sentiment that a turnaround in labor market conditions is not around the corner have contributed to deflating consumers’ spirits this month,” says Lynn Franco, Director of The Conference Board’s Consumer Research Center. “Expectations are likely to remain weak until the job market becomes more favorable.”
– The percentage of consumers claiming jobs are “hard to get” rose to 33.1% from 31.9%, while those claiming jobs are “plentiful” dropped to 10.5% from 11.2%…The proportion of consumers anticipating an increase in their incomes declined to 15.7% from 17.1%.
– It was inevitable, we suppose. When more than two million manufacturing jobs disappear and seven trillion dollars of stock market wealth evaporates, even the most confident of consumers may succumb to occasional anxiety attacks. Add soaring interest rates into the mix and it’s a wonder that ANY consumer retains the moxie to keep on borrowing and spending.
– But Chairman Greenspan declares that household finances are in tip-top shape. “The prospects for a resumption of strong economic growth have been enhanced by steps taken in the private sector over the past couple of years to restructure and strengthen balance sheets,” the Federal Reserve chairman said in his recent testimony to Congress. “Nowhere has this process of balance sheet adjustment been more evident than in the household sector.” We say, “Balderdash!”
– Even with the benefit of generational-low interest rates, the household “debt-service burden” — the percentage of consumers’ monthly income spent on paying debt -undefined is still a plump 14 percent, where it has been stuck since 2001. For perspective, the debt-service burden immediately prior to the past two consumer spending booms was closer to 12 percent, according to Merrill Lynch chief U.S. economist David Rosenberg.
– What’s more, in the olden days of the Bush the Elder’s Administration, folks used to save a bit more money than they do today, under Bush the Younger. The household savings rate was 7.7 percent in the last month of the 1990-91 recession, compared with just 3.5 percent now. “As a nation, we have come out of the recession overspent as opposed to underspent,” says Rosenberg. Hard to quarrel with that assessment.
– Northern Trust economist Paul Kasriel backs up Rosenberg’s analysis by pointing out that in every recession since World War II, the ratio of household debt to assets has fallen. In the most recent recession, however, the debt/asset ratio skyrocketed, setting a record high of more than 18 percent in the first quarter of this year.
– “Households have not meaningfully repaired their balance sheets since the onset of the last recession,” Kasriel wrote in a recent research note. “Households are not ‘better positioned’ than they were earlier to boost outlays as their wariness about the economic environment abates. If anything, they are more poorly positioned to do so.”
– Furthermore, the steady rise of bankruptcies suggests that consumers never really stopped borrowing and spending throughout our mini-recession. Instead, they continued to borrow and spend, just like they did during the boom times of the late 1990s. In present-day America, it’s all-consumption-all-the-time.
– Another unique feature of America’s recent shallow recession is the correspondingly shallow bear market in stocks. The Dow Jones Industrial Average undefined like a Timex watch – has “taken a lickin’, but keeps on tickin’.” It’s true that the blue chips suffered a 38% loss from their all-time high of 11,722 in January of 2000 to the bear market low of last October. But it’s also true that the 1929-edition bear market erased a whopping 89% of the Dow’s peak value.
– “Using the Dow’s high of 11,700 made in 2000,” SafeHaven.com observes, “if this bear market were to match the severity of declines made after the crash of 1929, the Dow would bottom at 1,287″…Now THAT’S a bear market!
Back in Ouzilly…
*** Your editors are hosting a conference on…would you believe it…writing for the Internet! So, Daily Reckoning readers get a break today; we have not had time to do as much reckoning as usual.
*** But here’s an interesting item from a recent Barron’s. Remember how you should Buy Low/Sell High? Well, we don’t know exactly what is low enough on Wall Street to make us want to buy, but when Bridgewater Associates looked at 20 of the leading Internet companies, they found a group high enough to make us want to sell. Ebay, Amazon, Yahoo, Priceline and the rest of the group are now valued by the market at $122 billion. But taken together, they have earnings of only $25 million. That gives them a collective P/E of 4,878.
“I made a lot of money selling those companies short a couple of years ago,” Porter Stansberry told me yesterday. “Guess I’ll get another shot at it.”
*** And poor Alan Greenspan. He should have quit when he was ahead. “Something has gone very wrong with the maestro,” writes Paul Krugman in the NY Times.
What went wrong was that the economy failed to cooperate with his first 12 rate cuts. And when the 13th came along, it actually seemed recalcitrant, even surly. Instead of going down, which would have set in motion another round of refinancings, mortgage rates went up. Last week, they were at their highest level since January. How can you keep the illusion of prosperity if you can’t lure people into greater debt with lower mortgage rates? How can you keep the world’s mouth fed without more credit? We will see, dear reader, we will see.