Natural Gas - Out of Whack

29. August 2009 by Dan Walkow, CFA, CMT.

North America is awash in natural gas, so much that storage is overflowing,  drilling rigs are being mothballed and wells are being capped.

The giant United States Gas Fund, as noted here before, keeps spot prices low by selling spot and buying forward futures. Could this phenomena be creating artficial pricing in the gas market? Maybe. The US government is certainly concerned as it looks to cap some of these commodity funds given their size and impact over markets.

Never the less natural gas is cheap and abundant and best of all it is a domestic resource in the United States and Canada. According to the EIA it makes oil four times more expensive than natural gas to produce the same amount of energy.

Forget wind power, hydro power, other alternate energy sources and even coal, natural gas is cheaper then them all.

There was a lot of talk by Boone Pickens over the past few years about “security of energy supply” with gas being part of the solution so why is gas in limbo?

Here is a novel solution. Lets assume President Obama is musing one day and thinks I have a whole bunch of problems to solve, what could we do to:

1. Reduce the budget deficit.

2. Promote the Green Initiative.

3. Become more self-dependent when it comes to energy supply.

4. Encourage energy conservation.

5. Invest in American infrastructure long term.

 He reads the blog and says ” I got it” we will impose a $10 importation tax on crude oil. Since we import almost 10 million barrels a day that would work out to about 36 billion or so in tax revenues.

Meanwhile apply tax credits to encourage conversion to gas powered automobiles and distribution systems.

Sure you would have higher gasoline prices but if one puts it into perspective, the US has some of the lowest fuel prices in the world. For example Canadians pay, on average 40% more for gasoline and we won’t even calculate Europe!

Would there be alot of squawking and outrage? Sure, oil exporters such as Canada and Saudi Arabia would be outraged as well as the oil lobby and the usual suspects. But they would adjust.

I cannot believe that this solution has not be considered by the powers to be as it is so logical and would solve several issues. One has to suspect that special interest groups and vested interests have kept this one on the drawing board with the excuse that to impose a energy tax in these trying economic times is not the right thing to do.

I do not have the hard numbers nor have I done the math but crude oil moves around $10 a week sometimes and I suspect that with a $10 increase in crude oil, the price at the pump would not change all that much. Even if it did it would still be lower than most industrialized countries around the world.

Meanwhile an effort to convert the USA to a natural gas-powered nation would have long term benifits; to wit: security of supply, less pollution and domestic control of energy reserves.

Great article on the state of natural gas markets here at TIME.

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