Brad DeLong's Semi-Daily Journal (2004)

I'll take this as clear proof that Bush's policies are not only maker America safer and more prosperous, but making the world a better place in general.

Now, if you'll excuse me, I have a very important meeting with the Tooth Fairy and the Easter Bunny.

I don't think Cheney was counting on this....or was he? It's not easy to read a vacant, aimless cipher when he's trying to prove himself.

CNN/Money is already calling this "Is there a bubble in crude oil?" It's odd that gasoline prices in LA have finally dipped below $2 a gallon as oil prices have risen to $49 a barrel.

"The price surge isn't being driven by any physical shortage of oil, but rather by concern that OPEC won't be able to make up for the loss of Iraqi oil because it's already producing at near full capacity.... "

Hmmm... someone hasn't been reading the recent spate of articles on peak oil lately, have they???

CNN/Money is already calling this "Is there a bubble in crude oil?" It's odd that gasoline prices in LA have finally dipped below $2 a gallon as oil prices have risen to $49 a barrel.

Still, if investors are buying oil futures with the idea of holding supply from the market there is a real problem. Marginal supply withdrawn can keep prices at inflated levels for quite a while. We might use supply from the national reserve, but this is tricky. We may have a serious problem. There is no withdrawal of supply from Russia or Venezuela or Saudi Arabia. Hmmmmm.

Here's a conundrum that has been bugging me for a while. Advocates of coal liquefaction say that it can produce a petroleum equivalent at $35/barrel using existing technology. I understand that it requires new infrastructure that it only makes sense to build if you think oil will be above $35 long enough to make back the investment. But isn't there some price point at which it starts it look attractive?

South Africa actually has a coal liquefaction infrastructure that they developed to reduce international independence. Is there any point at which it becomes worthwhile for them to boost production and begin to export petroleum (or whatever the equivalent)?

A google news search turns up this:

Sasol near two-year high on oil price
http://www.bday.co.za/bday/content/direct/1,3523,1685049-6078-0,00.html

"Sasol is South Africa's largest oil company and produces about 40% of the country's annual fuel needs."

"The group converts coal into synthetic fuels and chemicals through the Fischer Tropsch process."

The supply need can in time be met, but supply is being bought up now and that is the problem. We might have looked to this problem quite a while ago, but as I recall conservation and efficiency are for "wimps."

Stephen Roach hasn't been mentioned here in a while, so I thought I'd correct the problem.

Roach is arguing that the common claim that a $10 rise in oil prices is worth a 0.4% decline in GDP growth is wrong if the economy is already at "stall speed." He claims that, "recessions are the rule, not the exception, in that context." Roach also rightly (I think) notes that the duration of high oil prices matters. The point often heard that, in inflation adjusted terms, the 1990 oil price spike was bigger, ignores the duration of the present rise in prices.

KHarris

The points you and Steven Roach make are just what troubles me. No longer am I impressed that the oil spikes of 1990 or before were sharper when adjusted for inflation. The duration of the present spike is an important problem, and we are slowing in growth and could easily falter.

Thinking of Steven Raoch -

http://www.morganstanley.com/GEFdata/digests/20040816-mon.html

Stephen Roach

Barring a sudden improvement in the national saving outlook, underlying asset values in the United States must be written down to match the ensuing reduction in this saving-short economy’s intrinsic growth potential. That’s where pressures on asset prices come into play.

Never before has the world’s dominant economic power lived this far beyond its means. Most believe that America is special -- that it deserves special dispensation from current account, debt, and saving adjustments. Just as history is littered with the remnants of other such new paradigms, I continue to believe that the United States will have to pay a steep price for its imbalances. As America’s twin deficits move inexorably toward the flashpoint, there is a growing risk that its external financing terms could take a sudden turn for the worse. The dollar, US equities, and credit markets strike me as most vulnerable to such a development.

Brad says earlier that if he'd read Andrew Tobias more he'd be a better person. Andrew Tobias too has some serious reservations as to the path forward in the US.

Let’s look at Andrew Tobias’ Big Picture items 8/16/2004:
http://www.andrewtobias.com/newcolumns/040816.html

1. Terrorism is a huge, productivity-sapping problem that is not quickly or easily resolved. Legions of security guards may make us safer, but not more prosperous.

2. We’ve gone from a giant global surplus of goodwill on September 12, 2001, to a giant global deficit. Having much of the world dislike and mistrust us can’t be good for business.

3. Having a higher proportion of our GNP go to nonproductive (even when necessary) military expenditures doesn’t make us richer either. …

4. Interest rates – whose long-term downward march from 1982 to 2004 so aided business and stocks and bonds and real estate prices – seem to have bottomed. So at the very least, they will not continue to fall (not for “good” reasons, anyway) . . . and at a time when we are running annual budget and trade deficits each in excess of half a trillion dollars, it’s possible to imagine they may rise.

5. Personal debt levels as a percentage of GNP keep rising. …

6. Educating our kids well does make us richer in a fundamental way, as does deploying energy-efficient technology, to take two important examples. But have you noticed that we’ve been cutting back on after-school programs, and so much else? And that it is Japan, not Detroit, that seems to be leading the way on energy efficiency?

7. Oil is our major import. As we burn ever more of it, at ever higher prices, we shift more of our wealth to producing nations.

8. The gap between rich and the rest grows ever wider. …

Broadly distributed, prosperity begets prosperity . . . even if, in the real world, mechanisms are needed, like the minimum wage and the Earned Income Tax Credit and a progressive income tax and Social Security – and scholarships – to help spread the wealth. In the long run, I would argue, such mechanisms, when not carried to extremes, make the rich richer, too.

And yet the powers that be have opposed the minimum wage and the Earned Income Tax Credit . . . and have succeeded in making the income tax less progressive (with rumored plans in their next term to make it less progressive still). …

9. The deep division in our country makes it hard for one side to cooperate with the other. Unity of vision and purpose (putting a man on the moon by the end of the decade!) do wonders for prosperity. As do trust and mutual respect.

10. And I haven’t even mentioned China and India, whose growth offers many Big Picture positives but lots of challenges as well . . . or global climate change, whose costs may be felt more and more in the years to come.

Darn - I can too spell Stephen Roach!

What a bunch of hooey. Every day these people have a new excuse. Every conceivable reason is trotted out except the obvious. DEPLETION. 2004 was the year world production of conventional oil peaked. The excuses are laughable.

Paul Callahan,

Long term futures have been indicating $35 only very recently. There is already a group (of some former Enroners I think) proposing such a plant for Wyoming. This plant is I believe an IGCC --integrated gasification combined cycle-- plant which produces electricity at the same time. I have seen the Dept. of Energy estimate that a combination liquefaction and power plant should cost about $10 less per barrel oil equivalent. The DOE also succesfully completed a similar project which produced methanol from coal.

http://www.casperstartribune.net/articles/2004/08/06/news/wyoming/15ab4e2f3f1c1c9487256ee800065388.txt

http://www.dkrdevelopment.com/

What a bunch of hooey. Every day these people have a new excuse. Every conceivable reason is trotted out except the obvious. DEPLETION. 2004 was the year world production of conventional oil peaked. The excuses are laughable.

Just what DID the Cheney energy taskforce talk about? Is this the tax he advocated on oil?

I keep feeling as though some folk are trying to bamboozle on the 'oil spike' point. A fresh google shows numerous articles saying that the 1980's spike, if adjusted for inflation to current dollars, would have the price of oil at ~US$80 (or more) per gallon - so US$50 isn't "that" bad. Why the feeling of a bamboozle? Because the EIA's data says that in constant 1996 dollars the 1980's spike was just over US$50 (see http://www.eia.doe.gov/emeu/aer/pdf/pages/sec5_38.pdf ). And according to the BLS inflation calculator, (from http://www.bls.gov/ ) US$50 in 1996 is US$60.36 today.

More significantly, and a point I keep tagging over and over in various places, is perception. Sure, there's the duration of this peak as well as it's climb, but there's a gut level I keep thinking people are missing. The "big peak" was 1981/1982 -- 22 years ago. Give or take, half today's labor force experienced that spike at best as second-hand -- some may have been driving, but it's most likely their parents who paid the gas bill. For approximately half the labor force current crude prices are the highest they've ever experienced, regardless of whether you consider it in nominal or 'real' prices. For a lot of these folk, talk of how it _used_ to be sounds a lot like "tales from grandpa" - you know, "When I was a boy I had to walk. Ten miles. Uphill - EACH WAY."

It is my belief that when people "vote the economy" they vote not on how the GDP is doing, but what their wallet feels. And 25% higher gas prices and 15% higher food prices in the past year while wages 'only' climbed about 5% does not make for a happy wallet. We'll have to see, of course.

Kirk Spencer

Nice points.

Ummmm.... before you go trotting out the canard about longterm contracts being so darn cheap:
December 2005 41.44 0.00 0.00 41.44 41.34 41.49 -0.05 41949
Straight from Nymex the December 2005 contract showing $41 a barrel. Cheap oil under $35 is listed out there in 2010-but the catch is that those contracts are not being actively traded. Hmmmm volume=0 is a big problem. So we will have oil over $40 for the foreseeable future according to the futures market. Not good, not good at all. Nat Gas is also doing pretty good. How does this hurt us? Well out chinese buddies are considering realigning their currency up to reflect the higher cost of imports into China and the lower value received for goods shipped to the USA. Dollar goes down, oil and natural resources go up. Supply and demand are fine and dandy, but the real fact is the cracks in the dollar facade and imperial idiocy that has managed to hobble the biggest oil reserves in Russia and Iraq. The really funny part is that Wall Street is starting to go seriously short and mainstreet keeps pouring money into a losing proposition. Down we go.

Here is what the futures market is figuring out and what the news should be telling us. There are no longer any swing producers. Saudi Arabia can no longer drive down the price of oil by upping production. No one con full fill that function anymore. Instead, in this post peak world, we have a swing consumer. China. When supply has peaked, the determining factor in pricing is demand. China, with its huge centrally controled economy, can now set the price of oil by deciding how much it is going to import in a given month. No strictly capitalist country has that ability. Figure it out. Time for the Bushies to start kissing Chinese ass.

"The really funny part is that Wall Street is starting to go seriously short and mainstreet keeps pouring money into a losing proposition. Down we go."

Please explain this comment. Barry L. Ritholtz seems to be claiming just the opposite at The Big Picture. Thanks.

http://bigpicture.typepad.com/

AllenM & anne,

Dollar down is generally a bummer for consumers but not so for the stock market. All this time that we've had a strong dollar has understated the value of foreign business in dollar terms. Just make sure to concentrate on those companies which support exports or do business overseas and avoid companies which sell stuff to American consumers if you expect this. A lower dollar should be good for employment as well, it's just that those who already had jobs will have their purchasing power reduced.

kharris,

It sounds like Roach is assuming the Fed will mess this up. I can't think of any other reason he would say that.

snsnerling,

Not sure. His argument seems to be mostly correlational - when this and this are both true, then that usually happens. Causal links aren't hard to imagine, though. In Roach's case, of course, there is also a link that seems either habitual or emotional. He is a paid-up member of the dismal wing of the dismal science.

snsterling,

I think Roach is claiming that the Fed has little ammunition left to avoid a recessionary dip. (He's made that point many times over the past months to defend his claim that the Fed should have raised rates precipitously earlier this year.)

kharris,

Very amusing and spot-on comment re Roach's habitual dismal outlook.

Anyone have a guess of the price of oil when the first pipeline in Saudi Arabia gets bombed?

snsterling, what dollar - or did you miss my earlier point?

According to the BLS (2003 consumer expenditure survey), the average proportion of wages spent on food last year was just under 14% of the total household expenditures (actually closer to 15% for all but the top quintile). In the last year, food prices have climbed approximately 15%, mostly of it in the last few months, predominately driven by rising gasoline prices. In that same time (again the BLS for source) average wages have stayed flat to declined for those other-than-top quintiles. Putting it into a more concrete example - if I was spending $2,000 in July of last year, approximately $300 of that was on food (necessity, not pleasure). In July of this year I'm _still_ only spending $2,000 (because it's all I have) but now $345 of it's going to food - or more accurately, I'm spending another $45 on the gas to get my food to the store from which I'm buying it before I spend money on gas to take it home from the store. That money has to come from somewhere, but everything else went up in cost as well. Spend money for investing on companies advantaged by a lowered dollar? Sure - WHAT money?

Let's get the tagline right this time: "It's the wallet, stupid."

(fast edit before post - "stupid" isn't a slam at you, snsterling. I suspect you know that by being aware of the origin of the line, but want to assure you that no personal attack was meant.)

So shouldn't the US be investing in Alberta oil sands? I recall reading that they could reliably get the oil out for about $15 / barrel, with the long-term sustainable / scalable price dropping below that.
(http://www.wired.com/wired/archive/12.07/oil.html)

The technology / sands are all ready to go. But, OPEC was previously able to play around with prices to keep oil sands noncompetitive. At $49 / barrel and maximum capacity, they can't do that now.

Investing in a reliable local backstop technology at $15 / barrel looks mighty useful. I'd willingly pay a small extra gas tax in order to up the % of my gasoline that I get from Canada vs. the Middle East.

Wonder what an energy economist like Severin Borenstein (also at UCB, I think) would have to say... Brad should call him up / walk down the hall and ask.

The Economist on high oil prices (of course this is the rag that predicted low oil prices for the forseeable future a couple of years ago)...

WHY are oil prices so high? That is a question to which the International Energy Agency, a quasi-governmental agency representing oil-consuming nations, would like an answer. Oil, as headlines have been screaming, this week reached a new record of $47. The agency's boffins are unimpressed. The title of the latest IEA report on oil, “Irrational Exuberance”, was a phrase made famous by Alan Greenspan, chairman of America's Federal Reserve, as he pondered the elevated levels of the stockmarket in 1996, albeit well before the share-price bubble burst.

There are in fact good and fundamental reasons for the recent rise. Demand for oil is soaring. Consumption appears to be growing at about 3% this year, up sharply from the level of recent years, thanks in part to robust petrol-guzzling in America, which consumes a quarter of the world's petroleum. The real surprise, however, has been China. Its booming economy has sucked up oil for use in everything from power generation to petrochemicals.
....
The sceptics at the IEA may yet be proved right: oil prices could tumble at some point, especially if demand stops growing or declines. But as long as spare capacity remains so tight, high prices (and possibly even painful spikes) seem more likely. And even if prices do fall in coming weeks they may well stabilise at a higher level than in the 1990s.

Raymond Carbone, an oil trader on the New York Mercantile Exchange, assesses the supposed oil bubble this way: “This is not Nasdaq 1999. This bubble is not as fragile.” He then hastens to add, “unless there is a worldwide recession.” The irony is that the longer and stronger the current rally in oil prices, the greater the chance of such a downturn. That points to the best reason for OPEC to bring spare capacity online as quickly as it can. When high oil prices push consuming economies into recession, it is the cartel itself that suffers most.

http://www.economist.com/finance/displayStory.cfm?story_id=3113102

Inflation, unemployment, high oil prices. Is this the 70's or the 21st century?

"That points to the best reason for OPEC to bring spare capacity online as quickly as it can".

Here is the fundamental delusional argument. The fact is that OPEC has no spare capacity. That is the point. No one, has spare capacity. That parrot is dead.

SW is right. The only thing SA might be able to pump sustainably at short notice is heavy, sour crude, which refineries don't find very appetizing. SA and other producers might be able to pump unsustainably, but that would be stupid of them.

Also, be careful about tar sands, liquefacation, and what not. The EROEI (energy recovered on energy invested) tends to be around or below 1, which means they aren't good energy sources, and thus very uneconomic. In fact, there is some wild talk about building a few nuclear reactors near the tar sands just to generate energy for the extraction process. Perhaps oil (a very convenient form of energy) from these various sources can be used to bridge a gap somewhere, but our real focus needs to be on efficiency (and not of the hair-shirt variety for those tempted to flame me) and heavy research into solar, fusion and biomass. Maybe the fusion thing will pan out, but otherwise we need to figure out how to live (well) with a lot less energy.

"Here is the fundamental delusional argument. The fact is that OPEC has no spare capacity. That is the point. No one, has spare capacity. That Parrot is dead."

Let's hope no sufficiently organized terrorist group figures that out...

And now, I recall that soon after Bush took office, he told us that "the American way of life is not negotiable." That was back when he torpedoed the Kyoto protocol. Don't you wish it was signed now? I didn't think much of the DNC message that clean business is good business. But, I am beginning to find it some serious merit in the light of this...

Tom DC/VA,

I do understand the concept of energy balance. That if you have a potential 'source' of energy which you can currently make at a certain price but uses at least equal energy as an input, then it isn't really a source at all but will go up in price as the energy input goes up in price.

But the actual situation with regard to the oil sands is that they are currently profitable and become more profitable as oil prices rise (even if nat gas rises too). I've seen the breakdown of the cost of a barrel of oil from the tar sands company Suncor and the gas input isn't that bad. Gas isn't so cheap on a BTU basis compared to oil, right?? (I seem to recall the price per BTU has been historically similar the with the exception of the last couple of months) Is it possible your estimate of negative energy balance is based on outdated level of technology? I just don't see how else they could be profitable.

A different perspective:

http://www.nationalreview.com/nrof_leuffer/leuffer200408180856.asp

Fear: There is no spare oil-production capacity. Any supply outage means we will run out of oil.

Fact: Non-OPEC production usually operates at full capacity while OPEC acts as the swing producer. While no one knows how much OPEC can produce, output by most member countries has surpassed the capacity estimates of analysts. Even countries that were thought to be tapped out — such as Algeria, Libya, Iran, and Nigeria — have shown steady growth in output in the past year.

Interestingly, the “call” on OPEC oil — or the amount that OPEC must produce to balance the oil market — has not changed in the past eight years as non-OPEC production has increased and higher output of natural-gas liquids have largely kept pace with world demand growth. Over this time period, however, lower production in Iraq, Indonesia, and Venezuela have required other OPEC producers to take up the slack. And they have: In total, the eight remaining OPEC members have increased production by more than 3 million barrels a day since 1998, or about 2 million barrels a day more than the decline in production from Iraq, Indonesia, and Venezuela.

Fear: Oil producers are experiencing a high level of operational outages.

Fact: Media coverage makes it seem like outages are more frequent. But it is because news organizations are more focused on the industry today that oil prices are so high. Labor strikes, mechanical problems, weather-related shutdowns, and strife in lesser-developed nations are constant challenges that confront the petroleum industry. But in actuality, non-OPEC supply has reached record levels this year, and production has been steadier than in any of the past five years. At the same time, OPEC production has increased by more than 800,000 barrels a day, even with the outages in Iraq.

Fear: Strong demand, driven by China, India, and the U.S., is responsible for the rise in oil prices.

Fact: Oil demand appears to be strong this year. However, supply looks to be stronger. In the U.S., for example, stocks have built at a record pace, suggesting that the increase in supply has even overwhelmed the growth in demand.

More, while strong economic growth has been the primary driver for the pickup in oil demand, unreported inventory builds have resulted in demand being overstated. There is also a tendency for forecasters to extrapolate demand growth, despite indications that demand will slow. In China, for instance, the government has taken steps to curtail the rise in petroleum product imports. In the U.S. and elsewhere, high oil prices are likely to slow petroleum consumption. Across the globe, credit tightening by central banks is likely to inhibit oil demand.

Fear: Terrorist activity is bound to disrupt supplies.

Fact: Since well before September 11, 2001, the world has not lost a meaningful quantity of oil production due to terrorist acts. Major oil production and refining facilities in most countries are thought to be potential terrorist targets, and so they are fortified. Security might be violated at these facilities, but they are not easy targets.

Overall, the chance of a major, prolonged disruption in oil supplies from terrorism is low. Even if a disruption were to happen and lost volumes could not be made up from alternative sources, the strategic petroleum reserves that many countries manage are perfectly capable of maintaining oil flows. Even OPEC’s strategic reserves could cover a loss of 2 million barrels a day for two years.

Fear: The U.S. and other governments must be aware that a terrorist attack on oil installations will take place or they wouldn’t be buying oil at $45 a barrel for strategic reserves.

Fact: The U.S. Strategic Petroleum Reserve (SPRo) was established in 1977 to create an emergency stockpile of oil to be used in the event of an oil-supply emergency. Congress has authorized the president to build that reserve to a maximum level of 700 million barrels, at his discretion. The SPRo currently holds about 666 million barrels.

Over the years, purchases for the SPRo have started and stopped. Oil has been released five times — once under former President Bush during the first Gulf War and four times under President Clinton. Starts, stops, and releases have been influenced by budgetary and political issues as well as by confidence and insecurity surrounding oil supplies. President George W. Bush ordered the SPRo be filled after the 9/11 attacks as a security measure. For the most part, the government has been a steady buyer for the reserve ever since.

In the past, the SPRo fill was viewed by oil traders simply as an inventory build. A large build in SPRo reserves usually was viewed as a negative for oil prices. But in the past year purchases have fuelled terrorist speculation — “the government must know something is going to happen or they wouldn’t be buying oil at these prices” — and allowed traders to front-run purchases, since the program is transparent and reasonably steady.

Today, a release of SPRo reserves in a non-emergency situation under President Bush seems unlikely. So, traders view the SPRo more as consumption than inventory. But the more oil we have in inventory, the more secure markets should feel about the available oil supply. For the moment, the market seems to be reading this differently.

Fear: New, large oil discoveries have been few. Oil companies are having trouble replacing production.

Fact: The perception is false. Dozens of giant oil fields have been discovered in the past few years in the deep-water Gulf of Mexico and offshore Angola, Nigeria, Brazil, and Malaysia; in shallow water in Kazakhstan, Azerbaijan, and Equatorial Guinea; and onshore in Russia, Trinidad, Chad, and Canada.

These are the fears and the facts. Taken together, the only conclusion can be that oil prices will fall hard — perhaps to $25 a barrel in 2005. But two conditions are necessary for this to happen: Inventory levels need to rise further and there must be no major supply interruption. As inventories rise, speculators will shift their focus from fear to fundamentals.

Fear: New, large oil discoveries have been few. Oil companies are having trouble replacing production.

Fact: The perception is false. Dozens of giant oil fields have been discovered in the past few years in the deep-water Gulf of Mexico and offshore Angola, Nigeria, Brazil, and Malaysia; in shallow water in Kazakhstan, Azerbaijan, and Equatorial Guinea; and onshore in Russia, Trinidad, Chad, and Canada.

Numbers please. "Dozens of giant fields" may play well on TV, but let's hear some numbers as to how the capacity of these finds compares to current oil usage.

The really interesting thing about this particular point in history is that we no longer have to bother to waste our breath on the idiots who contend that "there are a multitude of giant oil fields discovered in recent times". The results will speak for themselves. You think you know where the oil is? Bring it on!

SW,

Shiek Yamani, former Saudi Oil Minister, seems to be confirming your view. Saudi Arabia has long viewed US (and other) strategic oil reserves as evil, wicked consumer attempts to undermine OPEC's pricing power. Today, however, when asked about the US tapping the SPR, Yamani said "they have to, unless they are not unhappy with present prices." That sounds like a veiled admission that Saudi Arabia can't do anything about prices. Even odder, I think, is Yamani's next comment -- "If they (the US) have a long-term policy of reducing dependency on Middle Easet oil, high prices are a way to do it." Almost certainly true, but still odd to hear from Yamani.

As regards the threat of pipeline or production disruption, it may be overblown. Though Iraq managed to set Kuwait's oil fields alight a decade ago, it took a large army to get the job done. Colombia has had its share of problems with pipeline attacks, but manages to repair the damage very quickly (goodness knows they've had practice). In fact, oil infrastructure outside North America tends to be very heavily guarded. It is a recent worry to the US public that we may lose access to oil due to sabotage, but it is not new to oil producers. The one-well attack in Iraq this week may be indicative of the capacity of non-sovereign groups, most of the time, to attack oil infrastructure.

Ethanol

"You think you know where the oil is? Bring it on!"

I think that was sort of the point of the article. With oil company inventories increasing, it sort of puts the burden of proof on those arguing there's not enough to go around. The oil has been brought, and then some.

Of course, eventually production will have to decline, but this eventuality can't explain current prices, as current production continues to increase well in excess of demand.

Fact: The U.S. Strategic Petroleum Reserve (SPRo) ... currently holds about 666 million barrels.

Wow, what a heyday the neocons and faith-based contingincies would have with that Revelations-based number(666)if some Godless heathen was believed to occupy the White House.. :)

Oil companies have typically had considerable flexibility in managing inventories. Inventories were frightfully low a year ago, with demand pretty clearly accelerating. Oil companies had some catching up to do. OPEC helped by producing beyond official output limits on a regular basis. The problem now, I would guess, is the tendency to avoid inventory accumulation when prices are high. Nothing sinister, just a business decision. Prices are high, and crude stocks were disappointinly low in the latest weekly tally.

Anybody know where we might get a look at the inventory/sales ratio for petroleum? That would probably give us a better handle on risks from inventory levels than would raw inventory data.

http://www.nytimes.com/2004/08/20/business/20gas.html?pagewanted=all&position=

Natural Gas Seems Headed the Way of Oil: More Demand, Less Supply, Higher Cost
By NEELA BANERJEE

As natural gas becoming the new oil?

At a time when the nation is chafing at its persistent dependence on foreign oil, it is becoming clear that the United States may be headed for the same situation with natural gas.

Demand is growing far faster than supply from domestic sources or from friendly neighbors like Canada. Soon, probably within the next decade, the United States will become a significant importer of gas from regions like North Africa, the Middle East, the former Soviet Union and the Caribbean, transported in liquefied form by giant tanker ships.

Faced with that prospect, policy makers and industry executives are pondering whether that means natural gas will become another vulnerable front in American diplomacy and energy security, posing the same quandaries and threats that crude oil does now.

The United States will probably be able to meet most of its gas needs with domestic production for another 20 years. But some analysts worry that, as with oil, gas supplies around the world will not expand fast enough to meet rising global demand, driving prices higher even as the United States turns increasingly to imports.

Like oil deposits, big gas reserves are often found in politically troublesome places. Because few of the world's gas-rich countries are stable, open democracies, there is a danger that gas revenue will flow into the coffers of corrupt, brutal governments, or that gas supplies will be disrupted by domestic instability the way oil exports have been in Venezuela, Nigeria and elsewhere.

In the worst-case outlooks, about which industry experts are deeply divided, the United States could find itself beholden to a small number of countries to keep its lights on, a prospect with profound implications for American foreign policy.

'Do we ever want to be in a situation in 20 years when we say, 'We'd better do this for the Russians or we'll be in a blackout?' ' said Amy Myers Jaffe, senior energy analyst at the James A. Baker III Institute for Public Policy at Rice University in Houston.

The United States now imports about 57 percent of its crude oil, but only 16 percent of its natural gas, and nearly all of that comes by pipeline from Canada. By 2025, according to recent Energy Department estimates, the country will be consuming

"The United States will probably be able to meet most of its gas needs with domestic production for another 20 years".

Not true. North American natural gas is already in terminal decline. Canada is going to have to stop exporting (a real NAFTA headache). Even the realists in this debate are overly optimistic.