2008 Woodie Awards
Natural Resource Commodity Prices: Why They're High and Where They're Going
Michael Lepri '10
Issue date: 5/1/08 Section: World
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.
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.
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