Natural Gas: Flameout Ahead?

Depending on the full extent of hurricane damage, ever-higher prices could even turn into shortages -- with dire economic impacts

By Mark Morrison

While the preliminary damage report for Gulf Coast refineries indicated all but a few would be able to restore many of their operations within a week, the assessment from offshore Gulf oil and gas production areas looked far more sketchy and will probably take more than a week to fully evaluate.

The reason: Oil-field workers will have to travel back to distant sites by boat or helicopter for inspections. And not until deep-sea divers check out wells and connecting pipelines can energy companies know how much damage Rita truly did.


  While the final answer will hold great importance for future oil and gas prices, what matters most will be the short-term impact on natural gas production. Americans were already anticipating a wildly expensive winter. Home heating bills in parts of the Midwest, for example, were expected to jump a staggering 70% even before calculating the effect of Rita. Now the price could go even higher.

Some economists are actually warning that outright shortages are possible. Cambridge Research Associates' Mike Zenker raised this specter at the National Association of Business Economists confab held this week in Chicago. As he noted, the outcome will depend on the extent of Rita's damage and the severity of weather in the winter months ahead. But the U.S. is now much more susceptible to shortages because of Rita than it was before, he argues.

"Rita has made a precarious situation even more precarious," says Zenker. "Because of the storms we have probably lost the equivalent supply of at least seven to nine days of gas consumption." That adds up to a scary amount, considering that U.S. industry was already losing some of its competitive ability due to high natural gas prices.


  What could happen? When a natural gas shortage occurs, most states give first priority to residential gas users. Commercial customers come next.

Electric utilities that serve both household and industrial customers are a wild card: These power companies have chosen gas as the fuel for almost all their new capacity in recent years and have built little capability to use such energy sources as oil or coal. Industrial concerns -- many of them hooked on clean-burning gas since the 1990s when it was readily available and affordable -- come last in most states.

A curtailment can also affect some companies that urgently need gas not as a source of power but as a feedstock to make products. Without enough gas to operate, some businesses, such as those that make chemicals or fertilizers, will have to suspend production or consider moving more of their production to foreign locations where natural gas costs less than one-tenth the U.S. price -- and where the supply appears more reliable.


  Long before Katrina and Rita, the natural gas industry was trying to persuade Washington that the U.S. is hurting itself with policies that encourage a premium resource such as natural gas to be treated as a commodity and burned instead of coal or other alternatives to generate electricity.

In the short term, gas shortages and rationing could lead to an ugly winter of layoffs and lower economic growth. In the long term, the free-for-all market for scarce gas will lead some American companies to outsource yet more of their manufacturing -- and jobs.

Morrison is a senior writer for BusinessWeek in Austin, Tex.

Edited by Beth Belton

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