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Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: "IssueAlert" <IssueAlert@scientech.com< X-To: X-cc: X-bcc: X-Folder: \Steven_Kean_June2001_4\Notes Folders\Discussion threads X-Origin: KEAN-S X-FileName: skean.nsf http://www.consultrci.com ************************************************************************ Read SCIENTECH's free SourceBook Weekly article: "Australia: Jewel in the Crown for Some U.S. Investors" at: http://www.consultrci.com/web/rciweb.nsf/Web+Pages/SBEntrance.html ************************************************************************ =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH IssueAlert, October 9, 2000 Oil and Natural-Gas Shortages: Will They Create a Winter of Discontent? By: Will McNamara, Director, Electric Industry Analysis =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D U.S. retail energy fuel costs, already high by historical standards, are expected to remain high this winter due to crude prices that are projected to remain at levels unseen since the Gulf War, said the Department of Energ= y on Friday. In addition, households that use natural gas are likely to see the largest year-on-year percentage increase in their bills as well, accord= ing to the Energy Information Administration (EIA). The agency said U.S. reside= nts can expect heating expenditures to increase by 25 percent for heating oil and propane and 40 percent for natural gas. ANALYSIS: Despite common belief to the contrary, there is a direct correlat= ion between the price cycles of oil and natural gas. The fact that there are legitimate concerns surrounding the availability of both power sources gives validity to the warnings of price increases this winter. When fuel prices are low and natural-gas supplies are abundant, there is arguably little connection between the two. However, the present situation as we head into winter is the exact opposite=01*high oil prices and a comprised supply of natural gas, leaving the two unquestionably intertwined. As energ= y users opt to switch from oil to natural gas, this affects natural gas suppl= y and raises gas prices. How did we arrive at this alarming situation, which may have been justifiab= ly labeled an "energy crisis"? Regarding oil, in 1998 the worldwide oil indust= ry witnessed a decline in oil prices=01*spawned in part by the economic proble= ms in Asia=01*which hit a low of less than $10 a barrel in March 1998. Oil pro= ducers voluntarily initiated decreased production, which unsurprisingly started a swift climb in prices in 1999, as demand started to increase in a=20 rejuvenated Asia and the United States. Together, this has created a volatile mix of substantially higher crude oil prices, lower inventories and increased demand. Even though OPEC has made promises of up to 1.1 million additional barrels of crude oil per day=01*a result of political pressure put on it by the United States and other countries=01*it may not be able to force its me= mbers to increase production, as obviously it's in the best interest of oil=20 producers to keep supplies tight and prices high. In addition, even if they materiali= ze, these increases promised by OPEC may not be enough to meet growing demand. This is alarming as the United States is very reliant on foreign oil, which already accounts for about half of U.S. oil use. The high price of oil has sent many customers looking for natural gas, only to find that it is also in questionable supply. Most reports suggest that natural gas heats about 55 percent of all U.S. homes. The imbalance between supply and demand found in the oil industry is also found in natura= l gas, resulting in a projected 20 to 40 percent increase in heating bills this winter. Over the last month, prices for natural-gas futures have climb= ed to record levels of more than $5 per million Btus. Yet, unlike oil, most of the blame placed on low supply for natural gas focuses on the United States rather than other countries. A reported 60 percent of federal lands have been placed off limits to natural-gas drillers, leaving as many as 200 million acres (out of a total of 1.5 billion) available but restricted for natural-gas expansion. The Clinton administration and environmental groups have been fiercely protective of federal reserve lands and prohibite= d drilling for natural gas (or oil) in states like Alaska, where some 36 trillion cubic feet of gas is known to be locked underground. At the same time, EPA standards have become so pro-natural gas over the last decade that few coal-fired plants have been built in the last 10-20 years, placing an increasingly high dependence on natural gas, even though alternative fuels are not necessarily available to serve as a substitute. Given the connection between oil and natural gas, any successful attempt to lower oil prices would in turn help to lower natural-gas prices. The ability to rely more heavily on oil once again would decrease the need for fuel switching, thus reducing the present burden on natural gas. Toward this end, in late September President Clinton authorized the release of 30 million barrels of crude oil from the U.S. Strategic Petroleum Reserve (SPR), the nation's emergency oil stockpile. The president's action caused additional alarm in some groups who said that the need to tap into emergenc= y supplies so early in the season signaled real trouble with oil supplies. Others said the 30 million barrels would do little to ease the problem, and that it would take between 2 and 3 million barrels a day for one month to reduce current crude oil prices. So what is the solution? As noted, the issue has become politically polariz= ed. Within their campaign proposals, Gov. Bush proposes spending $7.1 billion to open up U.S. energy resources and reduce dependence on foreign sources. Specifically, Bush has proposed, among other things, opening 8 percent of the Arctic National Wildlife Range, which probably contains about 10 billion barrels of oil. Vice President Gore opposes drilling in federal land, and instead aims to protect the U.S. environment, increase reliance on low-pollution fuels and focus on energy-efficiency / lower consumption programs. Articulating the Democratic position on this issue, Senator Joe Lieberman made the following comments last week in the vice presidential debate: "There are more resources within the United States. If we can get three miles more per gallon from our cars, we'll get a million=01*we'll sav= e a million barrels of oil a day, which is exactly what the refuge, at its best, in Alaska, would produce=01(We've got to develop fuel cells, alternat= ive energy. We've got to encourage people to conserve..." But what is the answer now, as winter fast approaches? Unfortunately, natur= al gas has no emergency fund like the SPR which it can tap into. The degree to which the oil/gas supply issue will have a dramatic impact this winter will depend on the weather. The colder the temperature, the greater the need for heating power sources, which will drive up the cost for both oil and natural gas. Meteorologists are predicting a tough winter, one that in actuality may be near normal but will seem colder after the four past winters, which were unusually mild due to La Ni=0Fa. Already, temperatures are dipping to surprising lows across the country. Considering that it is only early October, warnings are continuing to accumulate that supply will be stretched to meet demand, which unquestionably will drive up the price of energy bills. Looking forward, much of what happens from here will depend on which candid= ate is elected in November. Most within the energy industry agree that more production is the only answer to supply concerns. Yet, expanding production will not be an easy task, especially in an election year. This is not an issue that is gaining high priority within Congress, as politicians aim to end their session before the presidential election. With such exceedingl= y opposed candidates, the impact that the imminent election will have on future energy policy cannot be underestimated. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH can help you find the answers you need. From simple questions to complex problems, our experts and consultants will get results. Learn more about our six service areas at: http://www.consultrci.com/web/rciweb.nsf/Web+Pages/About_RCI.html =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products including e-commerce and telecom in the electric utili= ty industry. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Will McNamara Director, Electric Industry Analysis wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Feedback regarding SCIENTECH's IssueAlert should be sent to=20 wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH's IssueAlerts are compiled based on independent analysis by=20 SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed or to be the basis for investment decisions of any kind. SCIENTECH's sole purpos= e in publishing its IssueAlerts is to offer an independent perspective regard= ing the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, pleas= e reply to this message and in the body of the email type "remove."
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