The gap between oil and gas prices is widening as oil prices climb and gas prices continue to slump.
With three weeks to go before the presentation of the 2010 Budget, this is not good news for the Government.
The ratio of oil prices ($ per barrel) to natural gas prices ($ per million BTU) hit a record 26.4-to-1 last week.
This means that crude oil is currently trading at a value 26 times more than gas.
This compares with a historical norm of six to 12 times.
The ratio has more than tripled this year amid a 67 per cent increase in crude prices (from US$41 in Jan '09 to $US72 in Aug '09) bolstered by speculation that Chinese demand will climb, while natural gas prices have fallen 48 per cent (from US$5.15 in Jan '09 to US$2.86 in Aug '09) due to reduced demand from industrial companies and the start of production at new US fields.
This marks the lowest price for natural gas in seven years.
The situation is made worse by the fact that US stockpiles of natural gas are 19 per cent higher than the five-year average in the week ended August 14, according to a US Energy Department report last week (US gas supplies rose 52 billion cubic feet to 3.204 trillion in the week ended August 14.
Analysts expect another 52 billion to be added in the week ended August 27).
Additionally there is speculation by many experts that storage companies will run out of space to put the heating fuel if they have not already (since there is a time lag between these reports) and US demand will only pick up when colder weather comes in later this year.
Why is this important to T&T one might ask?
Well as we all remember reduced energy prices prompted budget revisions by the government in terms of its budgeted oil and gas prices and consequently state expenditure plans. At the time of these revisions, oil prices were hovering around the $US40/bbl mark while gas stood just above $US4/mmbtu. Based on these figures government estimated the fallout from this downturn in energy prices to be TT$8 billion.
Fast forward to August this year, less than year later, and, as indicated above, the price of oil has recovered somewhat to reach US$70/bbl, however, during the same period gas prices continued its downward spiral to US$2.76/mmbtu, the lowest price since 2002 (US$2.50 in Jan 2002 and US$ 2.19 in Feb 2002).
Given this uncommon divergence in prices and more importantly the record low gas price, it was with great surprise to hear: firstly, the government and Central Bank's great optimism at the apparent recovery of oil prices (despite the continuous worsening of macro economic indicators both locally and globally).
Secondly, and even more surprisingly, the flippant tone used by the same entities in their analysis of the natural gas price situation saying that generally "gas prices will have to be monitored".
In terms of the latter it would be wise for both entities to pay closer attention to this predicament for two critical reasons:
Firstly, of the 90 per cent of export earnings that comes from the energy production, natural gas accounts for 80 per cent of hydrocarbon production and in turn contributes between 50-60 per cent (directly plus indirectly) to government revenue. That being said, if the 48 per cent fall in natural gas prices this year is not cause for concern among government and central bank officials then it begs the question: What is?
The second reason is that, unknown to Joe Public; the realized natural gas price is estimated to be around 50 per cent of the budgeted gas price.
This means that despite a revised natural gas price of US$3.25/mmbtu (which is near the average for January 2009 to August 2009, the average for 2008 was US$8) the continued global fall in demand for gas; the present sub US$ 3 dollar gas price; near capacity natural gas storage in the US; a bearish gas futures market; the failure of the announcement of an above average hurricane season to affect prices; higher-than-normal temperatures expected for the winter season; the start of production at new US fields; the absence of a "gas cartel"; and limited scope for expansion in the local natural gas sector, the realised gas price is likely to be less than 50 per cent the revised budgeted gas price.
How much less will only be determined when the dust has cleared.
More importantly, how the government treats with these factors (if at all) when deciding on their budgeted natural gas price for fiscal year 2009/2010 will be interesting to say the least.
Where do prices go from here?
History clearly suggests that the price gap will eventually narrow, through some combination of oil prices falling and natural gas prices rising however it is very difficult to use these historical relationships to judge short-term price movements.
Some experts have suggested that natural gas prices have typically played more of a role in such gap narrowing than have oil prices. That would suggest an upcoming increase in natural gas prices but, as noted earlier, they would have to do so in the face of dramatically increased supply.
What has happened in the gas market may in fact be a major structural shift in supply which will not go away in the short term
In the end Government must plan its next steps carefully and seek to find a balance between their political wants and our economic need.
One can't forget that the last government to face recessionary conditions was soon swept out of power as people buckled under and then revolted against tough economic conditions; food for thought for the present regime.
