The Next Energy Crisis?

Bob Horton has survived the arrival of Home Depot and more economic downturns than he can remember. Yet this winter may be the last for his 40-year-old plumbing and heating supply shop in Osceola, Iowa, just south of Des Moines. The heating bill at his business soared to $602 last month, up from $250 a year earlier. He can’t raise prices without losing customers, and he has tried everything to save energy, from installing insulation to heating with a high-efficiency furnace. “It’s going to break us,” he says of his fuel bills. “We can’t pay the overhead.”

This winter has been no colder than most, but it’s leaving businessmen like Horton and homeowners across the country with a severe chill when they open their heating bills. The 62 million households that burn natural gas will spend 35% more this winter, according to the U.S. Energy Information Administration, with Northeasterners expected to pick up a record $1,276 average tab for the season. In the past five years, gas-burning homes have seen prices more than double. Those who rely on propane or oil for heat haven’t fared a lot better. But the big crunch is in gas. Here’s a guide to how that’s hitting consumers and businesses, who’s profiting and what you can do:

WHY IS MY GAS BILL SO HIGH? Natural gas used to be consumed mainly by firms making chemicals and other industrial goods. But in recent decades, electric companies, under pressure to pollute less, have embraced natural gas, which burns cleaner than coal or oil. Gas consumption by electric utilities has soared 76% since 1989. But unlike oil, easily transported and traded on global markets, gas poses logistical problems. It can’t be shipped unless it’s cooled and liquefied. For now, 85% of the gas we use is produced domestically. The rest arrives by pipeline from Canada, except for about 1% imported from such countries as Trinidad and Nigeria by tankers carrying liquefied natural gas (LNG). That equation is shifting. Production in the U.S. has slipped, down an estimated 5% in 2005, largely but not entirely because of storm damage to facilities in the Gulf. Meanwhile, Canada is consuming more of the gas it produces, leaving less to export. In short, we aren’t getting enough gas to meet demand–a combustible formula for high prices.

WHAT’S THE IMPACT ON THE ECONOMY? High energy costs will shave up to half a point off GDP growth in 2006, predicts Stephen Brown, an economist with the Dallas Federal Reserve Bank–“a drag on the economy,” he says, but not enough of one to tip us into recession. Still, slower growth means there will be pockets of pain. In Iowa, applications to the state’s energy-assistance program are up 8%. Public schools, hit with high heating bills, are turning down the thermostat and spending less on field trips. David Callis, who grows corn, soybeans and wheat in Missouri, has seen the price of fertilizer, which is made in part from gas, rise 50%. Consumers, meanwhile, are paying more for items like paint and plastic containers. Sherwin-Williams recently raised the average price of a gallon of paint from $22 to $26. One beneficiary: makers of home insulation, whose business is thriving.

For some companies, the run-up in fuel prices is one more reason to ship jobs offshore. In the U.S. chemical industry, where 100,000 jobs have vanished since 2000, companies are building plants overseas, where natural gas goes for a small fraction of the price it commands in the U.S. Dow Chemical is constructing a $4 billion petrochemical plant in Oman, and CEO Andrew Liveris says the plant would have been built in Freeport, Texas, if not for the price difference. At PPG Industries in Pittsburgh, Pa., CEO Charles Bunch says he may have to close two North Carolina fiber-glass plants. “We’ve lost a lot of jobs to China because of the labor-cost difference,” he says. “Now we’re starting to lose jobs in energy-intensive sectors.”

WHY DON’T GAS COMPANIES DRILL MORE WELLS? Oil and gas companies are flush with profits, so they could afford it. Exxon Mobil alone earned nearly $10 billion in the third quarter, a record for any U.S. firm. But companies seem more inclined to buy one another’s assets and invest in proven reserves than go hunting for new sources. Conoco Phillips recently bid $35.6 billion for Burlington Resources, one of the world’s largest natural-gas producers. In the contiguous 48 states, easily accessible fields are running full tilt. “We’ve had great success finding new reserves, but these are unconventional sources–low-permeability gas sands, shale gas, coal-bed methane,” says Peter Dea, CEO of Western Gas Resources, a Denver-based gas producer. Longer term, more supplies are on the way. The U.S. Interior Department last week opened for exploration 389,000 acres of Alaskan tundra and shoreline, which officials estimate may contain 3.5 trillion cu. ft. of natural gas. Yet that’s a pittance compared with the 22.3 trillion cu. ft. that the U.S. consumed in 2004. And two projects to transport gas from Alaska’s North Slope and Canadian territories are in the works. One proposal entails building a $20 billion pipeline to Chicago, but that would take 10 years to complete.

WHAT ABOUT IMPORTING MORE LIQUEFIED NATURAL GAS? Energy companies would love to ramp up the trade in LNG, and European countries grew keenly interested after Russia and Ukraine got into a nasty spat over gas supplies a few weeks ago, roiling world gas markets. But there are tall hurdles. The U.S. has just five LNG receiving terminals, and while regulators in the U.S., Canada and Mexico have approved 15 more, the projects are hardly assured. Australian firm BHP Billiton, for one, wants to construct an offshore regasification plant the size of three football fields off the coast of Oxnard, Calif., but opposition is mounting. Activists raise concerns about pollution and potential harm to wildlife from such a large industrial operation. A spokeswoman for BHP says the LNG industry has never had a major spill (although an explosion occurred at an LNG production plant in Algeria in 2004).

WHAT CAN I DO? Energy experts say we could ease out of our gas crunch with realistic conservation efforts. Groups like the American Council for an Energy-Efficient Economy say we could cut natural-gas prices 20% in the next five years if the U.S. would, for instance, mandate efficiency targets for power plants and offer more financial incentives for renewable fuels like wind and solar. Even some industrial bosses are calling for more conservation to keep the economy humming. Says Liveris: “It’s a shame the U.S. hasn’t put in place these policies.” As Americans are discovering, it’s also costly.

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