A different view of the gas situation

When we write about the developing problems in supply of oil and natural gas, the response, whenever there is a drop in price, is that we are totally wrong, rather than recognizing that there are still fluctuations between levels of supply and demand.  

In this regard there is a potential in the near term for a drop in natural gas prices, as noted by Harry Chernoff due to a significant reduction in demand.  His "back of the envelope" calculation is that the drop in demand from the shut down of industrial operations such as ammonia manufacture, now exceeds the amount of gas still shut-in in the GOMEX. There is thus a current build up in supply that may, depending on how demand changes with the cold in the short term, lead to significant changes in the price of gas.

The point is that unless the weather loads are substantial enough to maintain the market perception of potential end-of-season shortages, gas prices are vulnerable to a 20-30% drop even with no change in oil prices.
Unfortunately this is only going to be a short-lived phenomenon.
In the bigger picture, nothing that took place this summer in gas production and demand and nothing relating to the storage or pipeline situation changes the bleak long-term outlook for North American gas supply against the relentless increases in demand. The Energy Information Administration recently reported that the industry's reserve additions in 2004 were 118% of consumption versus 111% in 2003 and 118% in 2002 but that additions from new fields (as opposed to field extensions and new reservoirs in old fields) were by far the smallest they've been for at least the past 10 years. Despite all the drilling (and rapidly rising finding costs) roughly 90% of the reserve replacement is now coming from field extensions and barely 4% from new fields. The oil ratios are similar. From a short-term economic perspective, this increased intensity of operations at existing fields is a positive factor, indicating economic efficiency. From a long-term resource perspective, however, the implications are extremely adverse. The truly new resources simply do not exist at the quantities and the costs to which the country has become accustomed.

Sadly, however, the short term events may cause the longer term concerns to be discounted once more, and needed solutions will be pushed to the back burner for a while longer.

Once again the question must be asked: Are the $Trillions needed for extensive LNG importation facilities and vessels worth the investmet for a resource that will be exhausted in 20-30 years? Further, any realistic impact from increased LNG importation is unlikely to be seen for at least 5+ years as the Chinese have already tied up the shipyards with the contracts to supply their 100+ fleet of LNG tankers. A last major consideration is what might all the vast infrastructure be turned into once the end of its relatively short lifetime is reached? To me, it looks like one of the biggest wastes of materials ever given the massive opportunity cost loss from the road not taken.
There are still massive amounts of stranded natural gas around the world. The largest accumulation of hydrocarbons in the world is North Field in Qatar - bigger than the Ghawar oil field in Saudi Arabia.  Little of this has been developed and produced because of lack of proximity to markets.  

Ultimately the volume of global natural gas is limited, just like oil.  However, as a resource it is much less depleted at this point in time.  

The US can pony up and start playing the LNG game, or it can sit it out and deplete what little we have left.

IMO the fact that maybe 70-80% of NG left in the world is located in several distant fields in Qatar and Russia must be a strong argument against investing NG anymore.

I see some kind of "infrastructure idoling" going on these days that can potentially kill us. The fact that billions have been invested in NG pipelines, NG power plants etc. will lead to more billions invested in LNG so that we could keep our previous invesments alive; The result will be that it will become increasingly difficult to jump off the fossil fuel wagon as we invest more and more in an industry bound to yeild less and less returns.

The obvious alternative is to build a totally new infrastructure but when shall we gather the political will to do it?? I think that in the longer term NG will turn to be the worse problem than oil, as the time to build the alternative infrastructure (a chain of nuclear plants) is slowly ticking away...

Well sure.  The whole point right now is to stall for time and hope for a miracle.  Curtailing ammonia production only buys you a couple of months; you're severely wounding both fertilizer and polymer production.  Keep it up for too long and whole areas of the economy will start to collapse.

I think the trend is that this production is moving overseas.  To locations where they do have more plentiful supplies of natural gas.

In a way it makes sense - instead of transporting LNG so that we can make fertilizer here, make fertilizer somewhere else and then ship that here.

Sucks for the people who lose their jobs though..

And for the farmers who are paying double or more for fertilizer now than they did a year ago.

And for the consumers who will ultimately pay more for that food.

a recent article in the walla walla union bulletin on fertilizer costs:

http://www.union-bulletin.com/main.asp?Search=1&ArticleID=28443&SectionID=1&SubSectionID =&S=1

if they are having trouble with the cost structure of growing wheat around walla walla, then farming is in BIG trouble. for those who are unfamilier with that area of the country, walla walla is at the base of the palouse hills, which has incredibly rich,deep soil. we're talking 15-20 feet of topsoil. it grows non irrigated winter wheat, 100 bushels to the acre. i believe it is the most productive wheat country in the u.s. if they are having problems, we are having problems.

Then you soon will have to pay more for food and buy less of other things.

This is a problem that can be solved with the market moving resources from production of other stuff to food production.

the problem, magnus, is not necessarily one of cost of product to the consumer, but destruction of an essential industry. there is currently so much competition on the world market that we, in the u.s. , don't "need" to produce wheat, or manufacture power tools or computers, etc. here. "someone else", the chinese,or brazilians or chileans will do it for us , cheaper. this will come home to roost when cheap oil will no longer make these things possible. then where will  the farmers, factory workers, machinists, oil service workers be when we need them?
Given customers that will pay they will be between one and ten years into the future as long as the education system is ok.

You can of course hire me but I am so far only searching for a job in the Swedish energy industry. I can work for two. :-)

Well, I'm a farmer/rancher right now. But if energy gets too expensive, I'll probably only be able to grow enough for my family and a little surplus for my neighborhood market.

If I don't have diesel, I'll need slaves ... lots and lots of them.


You still have to feed, clothe, and house slaves.  Assuming you could do this for $8K/slave/year, diesel is still cheaper and of course easier to manage.  A barrel of diesel provides about 12 man years of labor at a cost of about $120.  I reckon the price will have to go up by a factor of 800X before we break out the chains and go back to slavery.
You could turn your farm into a small commune and work the land together for the benefit of all. "From each according to his ability, and to each according to his needs" works quite well at very small scale (only at very small scale in fact). There's also safety in numbers. If your farm can provide anything of value(knowledge to share, a small surplus of produce, or space for hosting allotment gardens for example) to the nearest local community as well, they may see it as being in their best interests to protect you and your lifeboat.
Turn your farm into a commune?

Let's see what historical examples we can find to suggest that's a way to feed people.

  1. Collective farms under Stalin - result:  mass starvation

  2. Collective farms under Mao - result:  mass starvation

  3. Shakers - lasted a while but lack of sex deterred recruits and successors

  4. Oneida Farms worked pretty well because the free love aspect had a certain appeal for a while.  Ultimately, metal working saved their bacon, so to speak.

  5.  New Harmony - two years then blooey.

Did I miss any others?
I believe you miss my point. Perhaps you come from a more ruggedly individualistic political culture than I do. Communism makes a terrible ideology under which to run a country, or, for that matter, any aggregation of humanity too large for each person to know every other person. It just doesn't scale up beyond the personal level (see Filters Against Folly by Garret Hardin for instance). I was not suggesting anything remotely reminiscent of forced collective farming.

We do not need to chose between the extreme of collectivization and the extreme of individualism - that is a false dichotomy. There are other viable choices in between, for instance small-scale cooperative structures. If I have a choice between cooperating with my neighbours and arming myself to the teeth in order to keep them at bay as they starve, I know which choice I will make. I have, in fact, been planning to do exactly this with my own farm for some time.

I regard it as giving my neighbours a stake in the support system I have built in exchange for their help in working it and protecting it. I cannot work it by myself without fossil fuels, nor can my family cover all the skill bases that would be necessary for a reasonable degree of self-sufficiency. We will need the help and expertise of others and are prepared to offer to share what we have in order to get it.

I could chose the market option and merely offer to employ others, perhaps at very low wages if they were sufficiently desperate, but such socio-economic disparity would only breed resentment. I would have to watch my back all the time, which would be a unnesessary waste of energy in an energy constrained environment. I realize that this option is not without its problems, human nature being what it is, but every other option seems even more fraught with difficulties.

Stoneleigh, I agree with you completely.  I don't have enough land of appropriate quality to truly be a farm, nor do I have the skills (yet).  But nonetheless, I believe that those who can become a useful part of their local community will be at an advantage compared to those who adopt a bunker mentality.  I am a pretty capable individual - I enjoy hard work, both mental and physical, and learning new skills, and I take pride in that - but I am not an army of one.  To be a part of a community means giving back to that community as well, it does not mean giving up one's individuality.  To be known within your area and thought of as someone of worth and value is a far better defense than a Glock by your pillow.

And to some extent it does scale up.  They don't hate us for our freedoms, they hate us because of our actions.  But even given our past, if we had spent the hundreds of Billions doing basic things to make life tangibly better for people in the areas that generate the terrorists, support for the small fraction of radicals would be low.  And by being an involved and valued member of the world community, we would be far more secure than we are now, without giving away our personal freedoms.  

Don, do you have enough waste straw/stalks, manure or the like to run your essential equipment using bio-methane or gasogenes?
I wonder about the same thing. If an extended natural gas infrastructure in Sweden mostly for distributing Russian gas will make sense or if UK, USA, etc will outbid us. We have a small distribution network along our west coast, more or less between Malmö and Göteborg distributing Danish gas.  There is also suggestions to distribute Norwegian gas and to build an LNG terminal. The terminal is proposed to be built near Stockholm to feed an old city-gas distribution network and cogeneration plants or near Oxelösund to power a steel mill.

The gas would be used for cogeneration in combined district heating and electricity powerplants and for replacing direct electric heating, oil and propane in industry. Carbon dioxide wise it would be good since it would displace oil and free electricity and give additional electricity production that can be exported to our coal burning neighbours.

My best bet is to leave the decision to the free market. If investors can find customers and contract enough gas to pay back the investment it would be dumb to not let them build. The pipes last for a century and when the gas run out we get a ready made pipe network for storing and distributing methane from biomass. This will give the investors a "long tail" income and money for maintainance untill the day comes when it is time to replace, reline or scrap the system and recycle the steel.

A LNG terminal will probably mostly be scrap metal when tha gas runs out, but you only need to run ot for a decade or two to get a good financial return on investment.

I do not think we will get a gas distribution network thar reaches a lot of individual homes. It will mostly be pipes to powerplants, industries and gas tanking stations for cars.  Most of the densely populated areas already have district heating wich makes it much more attractive with a central gas turbine and a heat recovery boiler then running a parallell pipe network to get lower efficiency. Wonder if the large number of homeowners abroad will outbid those gas users?

I kind of hope the new piplines in Sweden will be built but with someone elses money. ;-)

The pipes last for a century and when the gas run out we get a ready made pipe network for storing and distributing methane from biomass.

Where do you plan to get biogas to utilise a pipeline network designed for say 1bcf/day? Unless you are planning to say good bye to your forests in several decades better not do it. I'm sure it will start as a "sustainable" practice, but as conventional NG supplies start to drop and people start to feel the cold sustainability will be the first thing to be forgotten.

Why would we need to fully utilize a depreciated gas pipeline network?  The only problem I know with using it for low flowrates is the fairly large ammount of gas "stranded"  inside the pipelines to keep the pressure up.

The production of biogas methane was 1,5 TWh during 2003. One estimate of the potential methane production from farm waste is almost 17 TWh wich would cover 20% of the current car fuel needs for our population of 9 million.  

It would not be used for producing electricity or district heating, its too valuble as vehicle fuel.

I am not sure if vehicle fuel is a better use then district heating - the efficiency of the latter is in the range of the 90%... Accorging to http://www.cia.gov/cia/publications/factbook/geos/sw.html
Sweden now consumes just about 30bcf (10 TWh) of NG annualy which is about 20 times less per capita than US. If you scale NG to half of our consumption you will need 100 TWh capacity pipelines and the biogas production will utilise some 2% of it. In general it may be a good idea to some extent but I can say I like the current Sweden energy mix better.
I think NG consumption will be limited by high prices. Many people report turning down termostats to 60 or even below. For me it is a crisis, it is also sad that in the reachest country in the world people cannot heat their houses. I personally rent apartment and one of the reasons not to buy single house - heating and air conditioning would cost twice as much.
Interesting quesion about building NLG terminals. The same situation exists for oil refineris. Why to build new refineries if we approach peak in oil production. ALthough oil companies reject idea of peak in oil production soon, they still wait with investing into refineries before new production really appears.
This is an interesting insight.  It will be useful to track how many new refineries actually start construction in the next few years.  It will say something about what companies really think about the future supply of oil.
Once again the market is not sending the right signal to the general consumer.  Higher prices may cause demand destruction, but from the wrong place - manufacturing.  This is where we want energy to be used, to make things.

Instead with a small increase in price we drive out a number of industry consumers, balance supply and demand (or even free up some supply), and this allows conspicuous consumption for heating large spaces to continue.  This is inherently a wasteful use of a scarce resource.

Based on this model the last group to change will be the largest consumers and most innefficient sector of the market.  If price never really becomes a problem, you don't change your behavior.  There is a big difference between using energy for a need and using energy for a want.  I fear the "market" doesn't distinguish between the two because our society doesn't.

We need demand destruction in such a way that a technologically advanced society can continue.  From a Darwinian standpoint the demand destruction is not weeding out the least efficient and selecting for the most efficient use of energy.  Somebody, please point out the flaw in my logic.

You're right about the long-term consequences, but you should be clear on why the industrial users get shut down first.  For both electricity and gas, industrial users pay lower rates than residential users.  When there was excess capacity this was done to load level and make the utilities more money.  Along with the lower rates the industrial contracts state that they will get shut down preferentially.  So for years residential and commercial users have effectively been paying extra so that they will not be shut down in cases like this.
Agreed, if their supply is cutoff.  But is industry shutting based on lack of supply or based on increase in price?  
The increase in price is supposed to be due to the contraction in supply so the answer to your question is "both" are the cause.

What's interesting here is precisely that the market is sending the wrong signal about natural gas and it's going to both cost us jobs and encourage more wasteful consumption in the short term. It costs jobs immediately as businesses shut down, and then as prices rebound down temporarily, it will tell consumers that it's ok to buy the next McMansion. Then the cycle will repeat, at a higher price level. The consumers will complain, more businesses will shut down, and the price will rebound back down (but not as low as before) once again reinforcing the consumer's belief that they should continue consuming irresponsibly.

I wonder if we will see this yoyo effect in oil for transportation as well? It seems very possible to me.

"It costs jobs immediately as businesses shut down, and then as prices rebound down temporarily, it will tell consumers that it's ok to buy the next McMansion. Then the cycle will repeat, at a higher price level. The consumers will complain, more businesses will shut down, and the price will rebound back down (but not as low as before) once again reinforcing the consumer's belief that they should continue consuming irresponsibly."


Assuming of course those consumers didn't lose their jobs and can still afford wasteful consumption.
According to a California Dept of Energy plan (I'd have to search for the link), electrical generation plants will be shut first, primarily for safety concerns with many residential pilot lit gas systems still in use. They are afraid of putting out thousands of pilot lights, than causing fires when service is resumed. In addition, one 300 mW electical plant shut down would yield a whole lot of residential gas.
I don't think there is a flaw in your logic, and I don't disagree with the conclusion you've reached, but I think the underlying premise could stand some scrutiny.

First, we have 'the market', a common noun referring to a very real thing; and then we have 'The Market', a convenient fiction that we sometimes allow ourselves to believe is a sentient being equipped with an 'invisible hand' that it wields with flawless wisdow.  

Going along with this fiction of an anthropomorphic Market, one must remember that The Market is a cold and heartless bitch: you can play only if you have the money to pay. She doesn't care if what the thing you buy is used wisely and for the common good, or is  used foolish and for the benefit of the few.  She doesn't care if a load of natural gas is used to produce fertilizer to grow food for the poor or is used to heat the outdoor olympic-size swimming pool of someone like Bill Gates. When it comes to stuff like this, The Market is blind.

I also think the Darwinian analogy has some problems. If the name of the game is survival of the fittest, then the first question one must ask is: what makes someone fit or unfit in the eyes of The Market?   In the short-term at least, energy-efficiency is not the survival trait of importance, but rather the key survival trait is the ability to pay the price that the invisible hand of The Market demands.

Thus, a rise in the heating bill for Microsoft's corporate headquarters will hardly register on their radar screen, while the same increase in natural gas prices might push a marginal fertilizer plant operating on a razor-thin profit margin into bankruptcy. Fair? Sensible? Of course not, but that's the way The Market works.

I doubt I'm telling you anything you don't already know, and in fact I am agreeing with you.  But this is just my own way of saying that we shouldn't hold out too much hope for The Market to automatically pull us out of this mess, particularly over the long term.  

The sooner we stop believing in The Market and realize that the only real market is a lower-case one, the better off we'll be.

But this is my whole point.

The economists that post at this site and others use market forces of supply and demand to bolster their arguments.  Until supply shrinks why conserve?  After supply shrinks and prices rise people will conserve and alternatives will become attractive.

Okay supplies are shrinking, what alternative is becoming attractive?  It seems business is just opting out (moving overseas) or shutting.  For the average consumer this is a non issue.  Prices are not sustained at a high enough level for them to switch to non fossil or get on a track of energy reduction.

I'm not opposed to markets in general.  But if the market is not going wean us off fossil fuels than we need to scrap that approach and use a well crafted scientific decision tree to make decisions.  This used to be called national policy but we have abdicated all decisions to the invisable  "Market" recently.

Well, just to play devil's advocate, Hamilton and various posters on Econbrowser claimed that it is the "commons" that get depleted while owned and traded resources are husbanded more wisely.  Examples given of the former included the Rapa Nui's palm trees and fisheries in international waters.  Examples given of the latter were fine wines, racehorses and precious metals.  (I asked for more practical examples, but none were forthcoming.)

So the question becomes, is the market's track record wrt to resources really that great?

We humans are constructed in a way that when something is announced as "common" it turns out to be "everybody's". It is hundred times worse than being privately owned - I'm coming from an ex-socialist country and I have enough observations on that issue.

The economist's trick is that they provide us with only these two options (communism or capitalism?), while there is a third one which is very simple. Key resources are being enforcedly protected from human activity - the way we protect the biosphere through reservates and pollution regulations; or the way every nation is protecting its own land and people with its military.

We've been doing this all throughout the history and we have survived because of that, but the recent resource excess gave us the false sense that "the history is over".

Sometimes market does not leave much choice. I live in rental apartment and there is only one way to heat it - natural gas. The price should go probably 5 times up before I start thinking about renting smaller apartment.

We can begin with a simple premise: Democracy and market economics are not the same thing. Worse, the attempts to confuse and conflate them in pretended equivalence stood out at the millennium as a destructive aspect of U.S. politics. As noted, the rollbacks of democracy sketched in these chapters have accompanied the elevation of markets---the fulfillment of the North American Free Trade Agreement, the European Union (launched as a common market) and the World Trade Organization, and the ascent of the Federal Reserve Board as the protector and liquidity provider of financial and securities markets.

Washington, Jefferson, Lincoln and the two Roosevelts would probably have been appalled. Politics and government down through the ages, while often brutal or grossly deficient, have been the subject matter of Plato and Aristotle, Aquinas and Machiavelli, Locke, and a few of America's own great names. Markets, by contrast, descend from fairs of late medieval Europe, church-permitted safety valves for gambling, money-lending, and other forms of license. The idea that they have turned into a vehicle for human governance lacks any base beyond the occasional financial publication."
---Kevin Phillips, Wealth and Democracy (New York, 2002), p 417-418.

Well, in my humble opinion, Kevin Phillips just about nails it!
You might enjoy False Dawn by John Gray.
The "signal" is not wrong, our response is wrong.
In terms of resource allocations if some individual behavior (e.g. wasteful energy consumptin) is undesirable for the society as a whole (because it cuts jobs etc.) it is the responsibility of the government to stimulate the right type of behaviour (conservation) and to punish the incorrect one. That's why IMO that an energy tax (or better be a carbon tax) plus personal allowances of consumption (heavily taxed for the extra) can cause miracles in solving our problems.
It was Amory Lovins(?) who argued for neutral tax regimes--rebates for good cars balanced by extra fees for bad cars--- to steer the public in the chosen direction. Energy or carbon taxes could do similar levering. But not until the government is absolutely forced to.

Our response is business as usual. No I'm wrong, it is not `our' government response at all, it is the corporate government business as usual.  Still offering the big tax breaks for SUVs... and the energy bill passed in the U.S.: even more public money for the same old big energy which funds legislator's reelection campaigns.

The seasonal deterioration of the nat'l gas build began mid-November from a high of 3282-Bcf (6% above the 5-yr avg).  Altho long term forecasting sees this winter being slightly cooler than last year, it will be warmer than the averages.  Based on this, current production and LNG imports, it is almost certain that i will  be raising my Spring working gas trough forecast to 1050-Bcf from our Novembere projection of 1000-Bcf.  This is much ado about nuttin' ... and i foresee $8 gas acomin' as this decent supply becomes common knowledge.
What shocked me was the EIA testimony that LNG terminals in the US were NOT operating at anything like capacity!

The reason is that a terminal is no good without a supply and all the world's LNG liquefaction plants are on long term contract to some other place, leaving none on the spot market for US buyers.

Of course, new supplies will be created but how quickly and for how long?

Frankly, basing the US energy future on LNG is a very poor bet.  It's more than a hope but still it's not a solid play.

As further proof that we live in some sort of bizarro world, there are advertisements on TV in my area.  They start out asking what energy sources will we use in the future.  OK, good question.  

Then they come out and say "natural gas"!

Next time I see it, I will try and see if I can capture a URL or something.

Webcast of Peak Oil hearings in the house tomorrow?

when ready, transcripts will apparently be posted here:

nice. Thanks for that post.