Monday, February 9, 2009

Another Take on Gas Prices

A recent article in the Shreveport Times documenting a speech to the Shreveport Kiwanis Club by a couple of representatives from Chesapeake Energy offers a different take on the relationship of supply and demand on the price of natural gas compared with the LNG post below this one.

The Chesapeake reps take on the decline in the price of gas had to do with the decline in the use of natural gas, especially by industrial users, and the increase of domestic supply, especially through the new shale plays. They didn't address the concept that LNG dumping in the U.S. might increase supply significantly. The Chesapeake reps contend that a decrease in the number of active drilling rigs will lead to an increase in gas prices. A quote from the article:

"'The industry is very responsive to the price of the product,' (Chesapeake representative Kevin) McCotter said. So when the number of rigs drops, so will the supply. But demand won't drop, which will spur prices upward and lead to an increase in the numbers of rigs and increased exploration of development of the newest proven bonanza, the local Haynesville Shale."

I would love to believe that temporarily decreasing the number of rigs in the field will lead to an increase in gas prices, but I think it is naive. While I don't think the LNG dumping situation is dire, I think it needs to be taken in consideration. I think the ultimate issue determining price is demand, and I think the biggest issues related to demand are: 1) improvement of the U.S. and world economies, 2) increased use of natural gas in power generation and industry, 3) alternative uses of natural gas (i.e. the Pickens Plan), and 4) the possibility of exporting natural gas. I'd love to see the LNG ports turn into export facilities rather than import facilities.

Who knows what the appropriate price of gas is. It is highly dependent on the activities of traders and the sentiment of investors. Ultimately, I think economic stability and improvement will help a great deal.

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