Friday, May 20, 2005

The Maestro on energy

Whatever you may think of Alan Greenspan’s record as head of the Federal Reserve, he is a very bright fellow. I always learn something new every time I read one of his speeches. His most recent talk on energy markets is not an exception.

For example, it turns out that the 200 million light vehicles in the U.S. consume 11% of the world’s oil output.

But it’s not all trivia. Greenspan lays the blame on the current surge in oil prices on underinvestment in producing countries and the growing weight of nations with energy-intensive economies, such as China.

Interestingly, he pays at least as much attention to natural gas as to oil (gas is virtually ignored in the mainstream press). In the last few years, gas prices have risen even more than oil prices, although in a thermal equivalent basis they’re about $10 lower, and they’ve been much more volatile. The problem here is that demand has grown while US and Canadian supplies have lagged. Imports are growing, but the infrastructure for LNG has not been coming on line fast enough.

However, he suggests that once imports rise, the price of natural gas may fall from around $6 per million BTU to around $3 per million BTU. In oil-equivalent terms, that’s around 17 dollars per barrel.

He also describes technical advances that allow gases to be converted into fuel liquids (such as diesel). This opens the possibility for natural gas and oil prices to converge. Currently, long-term oil futures (for delivery in 5 years of more) trade at $46 per barrel, while similar contracts for natural gas go for the equivalent of $34 per barrel, so there’s hope that we’ve seen the worst in terms of price increases.

In the end, it’s a pretty optimistic speech with a simple message: never underestimate the power of technology and price signals.