Fuel Prices As We Go over the Top...?
We already have an example of a (nearly) isolated
market that has definitely gone over the top of production, and that is
the North American natural gas market. Production peaked several years
ago, and a slow decline has begun, in spite of record drilling.
This phenomenon has occurred at very close to the same time for almost
all the major basins on the continent. If we look at the NYMEX
wellhead gas price for the last 75 years, we can see that the
price was very low indeed until about the time of the first production
peak in 1970, and
then rose to an reasonably steady $2US per thousand cubic feet, which
held until about 1999. During this period, it was relatively easy
to meet any production shortfall by drilling new deposits. (One
thousand cubic feet of gas has very close to one million BTU of heating
energy, which is also close to one gigaJoule.)
Since 1999, the price has risen by a factor of about four. It should come as no surprise that this has occurred as the limits to gas production became impossible to ignore. Drilling rates rose dramatically, while production reached a plateau and began to decline slowly.
year-by-year graph does not show is the shorter-term variation, which
been extreme over the last year. The all-time (so far) maximum of
over $15US per million BTU, achieved in December 2005, has been
by a minimum of barely over $4 in September of this year, and some large
players paid dearly for betting on high prices. This has led
some people to think that the "crisis" is over.
Nevertheless, the president of the Americal Chemistry Council said recently: "Make no mistake, the natural gas crisis hasn't gone anywhere.", and the bets are on increasing prices once again.
The question that arises is why the price has fallen so far in an
era of dwindling supply. The answer lies partly in the mild
winter of 2005/6 and moderate summer of 2006, but the steady shutting
down of industry has a large and on-going influence on consumption and
on price. Industrial users of gas pay the lowest prices,
and are the first to shut down or move their production facilities
the price rises. This acts as a brake on the rise. U.S.
industrial consumption of gas fell 22% between
1997 and 2005, and the U.S. has lost three million
since 2000. Canada will not have been immune to this type of
change. The deindustrialisation of North America is already under
way, even though "Peak Oil" (and gas) is only just beginning to enter
mainstream public debate.
Industrial consumption is still very large, so there yet remains a
considerable fraction of the gas demand that can gradually be destroyed
at relatively low prices. Will this allow production to decline
by say twenty per cent without the price going any higher than it
already has? Adding to this effect may be a decrease in gas
to make electricity, as deindustrialisation destroys electricity demand
too. Will the result be that gas depletion remains partially
hidden from public view by the economic downturn that it has helped
cause? A collapse of the debt bubble and hence of the US dollar
would no doubt cause a major reduction of consumption by all
sectors. It is not too difficult to envisage a situation in which
real prices do nor rise much, or even fall, while a major decline in
gas production is officially explained by economic factors, rather than