Natural Resource Commodity Prices: Why They're High and Where They're Going

In recent months, the costs of the natural resources of oil and gas have noticeably increased for United States consumers.

Natural gas is now becoming a global commodity with more trade to a larger base of countries. In 2003, increased investment in Liquefied Natural Gas (LNG) allowed natural gas that was usually consumed in the country in which it was produced to be shipped all over the world. LNG does just what its name suggests: It converts natural gas to liquid form for easier storage and transportation. It was thought that shipping natural gas globally would lower prices as a result of increased supply. The market for natural gas is changing, however, and producers are now looking to ship to the markets that are the most profitable.

Because the U.S. dollar is weak, there is difficulty competing for imports with countries that have stronger currencies, such as Japan. Natural gas suppliers will not retain high earnings by shipping to the U.S. because of the depravity of the dollar. Thus, we might need to increase our prices for natural gas to compete for imports.

The price of natural gas has also been affected by new global warming legislation which is making it harder for companies to use alternative fuel sources such as coal. Natural gas is continually being substituted for coal because it is cleaner. As The Wall Street Journal has noted, however, "there's no science . . . that can accurately predict how much economic pain will be caused as a result of their [the government's] proposals." In other words, government policy restricting the use of coal will push the price of natural gas higher and create a larger burden for all consumers.

According to a recent report by Bernstein Associates, either oil needs to come down to $70 a barrel or natural gas prices need to rise significantly. The latter is more likely. These two resources usually rise and fall together due to market forces, but oil has recently defied conventional wisdom.

Many are wondering whether the high oil prices will remain at current levels. The government has tried to decrease the demand for oil by using alternative resources such as corn ethanol. This has proved unsuccessful, however, and, according to The New York Times, "is now blamed for driving up food prices . . . and providing a third less energy per gallon than gasoline." Government subsidies for ethanol will only hurt the food industry by decreasing the supply of corn and raising prices. For example, about 450 pounds of corn, enough to feed an average person for a year, will only yield 25 gallons of ethanol.

The weak dollar is also increasing the price of oil as it did natural gas because most of our oil is imported.

According to Robert Mabro, oil expert at the Oxford Institute for Energy Studies, "prices are rising because everyone expects them to do so." Most consumers and speculators believe that the price of oil is only going to increase due to the poor economic conditions. This, however, should not occur if consumption drops and supplies increase.

Oil, like many other commodities, is traded on the New York Mercantile Exchange. People buy and sell futures contracts on this exchange. A futures contract is an obligation to buy or sell a particular commodity at a specific price, location, and date in the future. Speculators profit when they sell these contracts high after they had bought them low, so there is no doubt they hope the prices will increase in the U.S.

The demand for oil in the U.S. fell four percent in January from what it had been a year earlier; however, demand in other developing countries has been increasing. With the world population and the number of cars and trucks likely to increase, the demand for oil will likely follow suit.

The most obvious way to help gas prices is to increase the supply of oil by increasing domestic exploration and production. Analysts estimate there to be a trillion barrels of undiscovered oil in the world. With no sufficient alternative sources, the government and states need to consider allowing more drilling in the U.S. More oil production in this country would decrease our dependence on foreign oil and lower the price of gasoline. Increased discovery in places like the Arctic National Wildlife Refuge (ANWR), which is a national wildlife reserve in northeastern Alaska, could yield as much as 16 billion barrels of oil according to the U.S. Department of the Interior.