by Bob Shively, Enerdynamics’ President

In the mid 1990s, I attended a speaking engagement by Larry Bickle, then CEO of gas marketing company Tejas Power.  In the room full of natural gas producers and marketers, Bickle asked, “How many people think high gas prices are good?”  When almost all the hands in the room shot up, Bickle said he thought they were all wrong.  What was needed, Bickle argued, were long-term moderate gas prices that would allow gas to build its market share and become the dominant fuel choice. Unfortunately, the desire for stable prices was wishful thinking.

Since 1997, U.S. Henry Hub monthly spot prices have run as low as $1.72/MMBtu and as high as $13.42/MMBtu.  But what we have not had is a stable price that facilitates long-term planning.  As a result, any consumers considering a long-term investment with a value dependent on natural gas prices must first face the question of whether gas price volatility makes the investment too risky.

Henry Hub Monthly Spot Prices Since 1997

In May 2008, Henry Hub spot prices were $11.27/MMBtu.  The market perception was that we had entered an era of tight gas supply and high demand, and that the market needed to learn to live with prices at these levels. Numerous companies rushed to complete multi-billion dollar investments in liquefied natural gas (LNG) terminals so that cheaper international sources of gas could be moved into the U.S.  And many electric utility companies begin planning for new coal generation with the assumption that gas was too costly. The Energy Information Administration (EIA) projected that annual average prices over the next decade would range from $6 to $7.50 and that higher prices would hold down gas demand. Futures prices for the next year were in the range of $9 to $11.  

Three short years, one economic recession and a gas shale boom later, Henry Hub spot prices started the month (May 2011) at $4.69/MMBtu.  The market perception is that we now have 100 years of natural gas supply in the U.S. and that gas prices will remain low for a long time.  Companies that rushed to complete LNG import terminals are now applying to FERC to convert them to export terminals to send U.S. gas to Europe, Asia and South America.  Electric utility companies have halted almost all coal units not already under construction and have moved quickly to favored gas units. The EIA projects annual average prices over the next decade will range from only $4.48 to $4.87.  Forecasters predict natural gas demand will grow steadily by just under 1% per year.  Futures prices for the next year are in the range of $4.70 to $5.30. 
 
So which is it?  Should we be building gas-fired power plants and converting our cars to natural gas? Or should we be stocking up now on cheap gas to profit when the inevitable future high prices hit?  It’s a great question, and, to be honest, no one knows the answer. Certainly no one I’ve heard is talking about $10 gas anytime soon.  But despite all the folks talking about long-term $4 to $5 gas, there are a few others suggesting that a $6 to $8 range may not be so far-fetched. 

In next week’s blog post, I’ll continue this discussion by summarizing some of the data on both sides of the argument.