My friends and family recognize that I am an odd bird. I often wake up in the middle of the night as a result of thinking about things that few others worry about. Tonight was a great example; my eyes failed open at midnight as I thought really hard about how to spread the word about the dramatic increase in natural gas prices that will almost inevitably occur in the United States within the next two years.

In the publications that I regularly read, it is impossible to avoid noticing that there are some enormous bets being placed on the premise that natural gas prices in North America will remain at levels that are between 1/3 and 1/6th of the world price. Despite all words to the contrary, those prices are not the result of some kind of incredible technical innovation that has fundamentally reduced the cost of finding and extracting natural gas; they are the result of a temporary imbalance in the market that makes available supply slightly larger than available demand.

Several factors have combined to produce the pleasant effect – for gas buyers – of very low prices relative to history and relative to the prices paid almost everywhere else. Mild weather, slow economic conditions, associated production from wells drilled in search of far more lucrative oil, the high rate of initial production typical in frack jobs, leases that require drilling, the inherent inertia associated with drilling activities and, perhaps, a little purposeful push from people who understand how to use low prices to destroy competition have all combined to ensure that gas seems plentiful – in North America.

The rocks and shoals ahead are a result of a different combination of factors. Independent gas producers are having enormous difficulty attracting financing needed to continue drilling; major producers have cut their drilling programs as a natural result of getting numerous questions about low prices from analysts and stockholders; too many new customers are buying into the marketing pitch that hydraulic fracturing will lead to cheap gas forever; the housing market looks poised to begin a serious recovery led by low supply and pent up demand; and there is a serious push to try to eliminate the transportation bottlenecks that have kept natural gas prices from equalizing around the world.

The significantly higher prices that I predict will last at least as long as the pleasant times with low prices because the only effective response – other than another dramatic recession – has a long lead time. Yes, I purposely used the singular in the previous sentence because I can only see one alternative to a replay of the dramatic rise in gas prices that occurred here between 2000-2008.

The only reasonable answer to a price rise driven by having an overall energy supply that is lower than the demand is an increased supply. There are only two technologies with the capacity to make a difference – coal and nuclear energy. I may be totally off base, but I do not see a new round of coal plant building anyplace outside of Germany, the home of brown coal fans.

In my less than humble opinion, we need to build new nuclear plants. We should have started building in earnest at least a decade ago, but the second best time to start any long lead time effort that should have already started is NOW. Unfortunately, I think that almost everyone who has the ability to take action on this warning is either hypnotized, dozing, or celebrating the fact that they will be the wreckers who capture the spoils as the economy crashes against the rocky shore of high energy prices.

Being a lookout on a very large ship can be a lonely way to spend the midwatch.

Disclosure: I am a nuclear professional who knows a number of other nuclear professionals who have moved on, been reassigned or even laid off as a result of project delays or outright cancellations. The common refrain from the decision makers is that they cannot justify the expense of developing new nuclear capacity at a time of low gas prices. I want to burn this graph into their memory banks.

Natural gas wellhead price history (US)

Natural gas wellhead price history (US)

Instead, I think they are engaging in delusional thinking, purposely encouraged by publications of graphs like this one.

Official gas price projections

Official EIA gas price projection – Aug 2012

Note: In my years of analyzing the energy industry, I have found that the U. S. Energy Information Agency is a terrific source of historical data about energy prices and a really lousy source of accurate projections about the energy market. Here is a fun way to spend a few hours; read some old EIA projections and then compare them to what really transpired. You will see why I have made that statement.

Before signing off, I do want to point out that there are at least a few people in leadership roles in the energy industry who get it. Here is a short video of Steve Byrne of SCE&G explaining why it is a good time to be building new nuclear power plants.

One more disclosure: I own some stock in SCANA, the parent company of SCE&G. I tend to like to invest in companies led by people with some vision.

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