Original story via email from The Daily Reckoning
David Sadler For Congress (2002) 12th CD/Illinois

By John Myers
The Daily Reckoning
Published 2003.07.31

" We're out of gas! " says Chairman Greenspan. Natural gas, that is. Earlier this month, Greenspan appeared before a Senate committee, as he often does. But on this particular visit, the maestro of monetary policy did not discuss the stalled economy or the record low interest rates that his Fed has engineered. Instead, he talked about the nation's looming natural gas shortage. And for once, he's right.

" Today's tight natural gas markets have been a long time in coming, " Greenspan observed, " and distant futures prices suggest that we are not apt to return to earlier periods of relative abundance and low prices anytime soon. "

In his testimony, Greenspan pointed out that the market - the best of our admittedly imperfect future predictors - is indicating high and rising methane prices throughout the decade. " The long-term equilibrium price for natural gas in the United States has risen persistently during the past six years from approximately $2 per million Btu to more than $4.50. Although futures markets project a near-term modest price decline from current highly elevated levels, contracts written for delivery in 2009 are more than double the levels that had been contemplated when much of our existing gas-using capital stock was put in place. "

Because the United States imports 53% of its crude oil (compared to 35% during the oil embargo of 1973), the country relies increasingly on natural gas to supply its energy needs.

According to the July 21st edition of Time: " Crude oil is winding down. The last nuclear power plant was ordered in July 1973. No meaningful alternative fuels exist. In short, Americans are heading toward their first major energy crunch since the 1970s. " Therefore, natural gas will play an increasingly important role in satisfying U.S. energy needs.

But it hasn't always been this way. In 1962, methane gas was considered a nuisance, not a collectable resource. Back then, gas was the ugly stepchild of the petroleum family - a safety hazard with no market value. Drillers cursed when they found it. In North America, gas sold for 30 per thousand cubic feet as recently as 1974.

But as the demand for energy surged in North America, the U.S. began to discover fewer and fewer rich oil wells. Meanwhile, companies began to consider the applications for natural gas. In short order, excess methane gas was not only being captured, but companies began to drill for it, routing production directly from the well into pipelines.

Today, natural gas is delivered to about 175 million American consumers through a 1.3 million-mile network of underground pipe. There are nearly half a million wells in North America producing natural gas.

One of the most valuable advantages of natural gas is that its supply cannot be disrupted by wars or embargoes. While the United States imports half of its oil supplies, a whopping 88 percent of the natural gas it consumes is produced domestically, while the remaining balance is imported from Canada via pipeline.

Unfortunately, many of the natural gas wells in the United States are beginning to run dry. A few years ago the Oil & Gas Journal published a wake-up article, detailing how Texas - which produces one-third of the nation's gas - must drill 6,400 new wells each year to keep its production from plummeting. That's a rate of 17 new wells every day. By comparison, a few years before, Texas was drilling just 4,000 wells to keep production steady.

This drastic falloff in production has occurred as drillers must drill smaller pools, which deplete much more quickly than their larger cousins. Today, new pools in Texas have become so small that after just one year of production, more than half the pool has been depleted. As U.S. domestic production continues to taper, more and more eyes are turning towards the reserves hidden in Canada.

According to the Oil & Gas Journal, the influx of Canadian natural gas into U.S. markets will steadily rise over the next several years. The WSOB, one of Canada's most attractive oil and gas basins, has over 200 Tcf of gas reserves - making it the largest basin in North America. It is still relatively immature, with a much lower well density than the over-drilled basins in the lower 48 states. In fact, only 25 percent of estimated reserves have been exploited in Canada, compared with 45 percent in the continental United States. This sets up windfall potential for Canadian petroleum companies and the shareholders who develop them.

Even conservative investors can't help but salivate at the rampant growth of Canada's natural gas markets. In 2000, a total of 5,500 gas wells were drilled in the WSOB. In 2001, 7,700 wells were drilled. Even with all this activity, geologists estimate that two-thirds of the WSOB's gas reserves have yet to be unlocked.

The expectation is that more and more Canadian methane will be used to quench America's abundant thirst for energy. Speaking at a natural gas conference on June 26th, Secretary of Energy Spencer Abraham suggested Congress should " help spur domestic production of natural gas and enhance our importation facilities to boost supplies, while reducing our nation's growing over-reliance on this one source of energy. "

Also speaking at the conference, Cambridge Energy Research Associates Chairman Daniel Yergin said a hot summer could trigger higher gas prices. " Every recession since the early 1970s has been associated with spikes in energy prices, " Yergin said. " The problem now isn't market failure, but disappointing drilling results, restrictions on exploration and a shift to new uses of natural gas that will certainly raise consumption, " he said.

The natural gas market is just beginning to heat up... and as anyone who has worked around methane knows, heat can cause an explosive situation.

Yours for energy profits,

John Myers for the Daily Reckoning

Editor's note: John Myers - son of the great goldbug C.V. Myers - has been helping readers earn surprisingly lucrative returns in stocks largely unknown to Wall Street's wunderkinder since his early 20s. Our man on the scene in Calgary, John has his fingers on the pulse of natural resource profits - including oil, gas, energy and gold. For more details on John's analysis of the post-war state of energy - as well as a clue to his recommendations - see the following free report:

America's Next Crisis
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