Considering U.S. and global oil markets separately would make little sense. Reserves of both oil and gas cluster in a few regions of the world; while Middle Eastern countries harbor well over half of proven oil reserves, the former Soviet Union, Iran and tiny Qatar account for 60% of proven gas reserves.¹³ Oil, however, moves easily from producing regions to the point of consumption. Shippers can easily redirect ocean tankers from one destination to the other. Pipelines provide the cheapest overland transportation for oil, but significant amounts also travel by rail, road and river barge.

Natural gas transportation is less flexible due to the low energy density of gas. At atmospheric pressure, a cubic foot of natural gas provides about 1,000 British thermal units (BTU) of energy; the same volume of gasoline (about two gallons) provides over 300,000 BTU. The energy density of natural gas can be increased by compression, but even at 1,000 pounds per square inch, gas carries far less energy per unit of volume than oil.

GOVERNMENT ENERGY FORECASTS In early 1997, EIA released the government's primary domestic energy forecast, the Annual Energy Outlook (hereafter AEO 97). To the dismay of renewable energy advocates and other environmentalists, EIA's reference case suggested that geothermal, solar, wind and biomass (including cogenerators) would supply substantially less new electric generating capacity than the agency had forecast in previous years. Whereas AEO 95 had reckoned the combined contribution in 2010 from these resources at 24.4 gigawatts (GW), AEO 96 shrank the estimate to 18.4 GW, and AEO 97 cut it even further to 17.3 GW. The windpower forecast took an especially large cut. While AEO 95 predicted 10.0 GW of windpower by 2010 (the latest year then considered), AEO 96 cut that to 5.1 GW, and AEO 97 reduced it to only 3.8 GW. Policy shifts account for some of the changes. For example, in January 1995, the Federal Energy Regulatory Commission overturned California's Biennial Resource Plan Update, which had aggressively woven large amounts of renewable resources into the state's energy plan. However, AEO 96 and 97 also embody the EIA's controversial decision-long sought by the gas industry-to reduce its natural gas price projections. In 1995, EIA had forecast wellhead prices of almost $3.50 per thousand cubic feet (mcf) for 2010, but AEO 96 lowered that to $2.15, and AEO 97 to $2.01 mcf. EIA attributed the reduction to falling drilling costs and rising yields per well. Due to lower prices, EIA foresees combined-cycle gas turbines dominating the market for new electricity generating equipment. AEO 97 predicts that electricity suppliers will add 319 GW of new and replacement capacity between 1995 and 2015; 81% of those plants will burn gas, or gas and oil. According to EIA, renewable energy resources, including conventional hydropower and municipal solid waste, will contribute only 4% to the additions. In the projections, the percentage of electricity generated from natural gas rises from 15% in 1995 to 31% in 2015, and gas consumption by the electric sector (excluding cogenerators) rises from 3.5 Tcf in 1995 to 8.5 Tcf in 2015. For the gas industry's position on U.S. DOE forecasts, see Interstate Natural Gas Association of America, "Projecting Average Wellhead Gas Prices: An Analysis of Forecasts Made by the Energy Information Administration," Publication No. 95-4 (Sept. 1995). This report is available from INGAA at (202) 626-3200.

Unlike oil, natural gas therefore cannot be moved economically by truck or rail. Over land, only pipelines are economical and even pipeline transportation costs more for natural gas than oil. Pipelines also can transport gas under small bodies of water; a proposal exists to link North Africa and Europe by a gas pipeline under the Mediterranean Ocean. However, no one seriously proposes a trans-Atlantic or trans-Pacific pipeline. Problems of unsuitable terrain also may prevent the construction of a pipeline, or a modest projected flow may not justify investment in such a capital-intensive fixed facility.

Even where construction is technically feasible, gas firms and their investors may shun pipeline projects. In the United States, regulation can increase the price of a pipeline substantially by, for example, requiring environmental mitigation measures or simply delaying construction. At the same time, FERC regulation of pipeline transportation rates effectively limits the return that investors can earn. Elsewhere in the world, gas developers face different perils. For instance, efforts to exploit the rich gas fields of the Caucasus region take place amid-and help to fan-simmering political conflicts.

Non-pipeline transportation of natural gas depends on increasing its energy density. For small volumes, gas may be compressed or only its heavier butane and propane components may be used.¹⁴ For larger volumes, liquefied natural gas (LNG) is the only current alternative.¹⁵ The gas is not chemically transformed, but cooled to -164 degrees Celsius, at which temperature it forms a liquid. After transportation to market in a specialized tanker, it is regasified. All three stages-liquefaction, transportation, and regasification-increase the delivered cost of the gas. Nevertheless, LNG now accounts for about one-fourth of the international gas trade, although its share may decline with the completion of projected international natural gas pipelines.¹⁶

The cost and limited availability of natural gas transportation mean that high gas prices in some regions coexist with surplus supply elsewhere. For instance, in 1994 the delivered price of LNG in Japan was $12.89/thousand cubic feet (mcf), more than $10.00 higher than the average delivered cost of natural gas to electric generators in the United States.¹⁷ Meanwhile, natural gas is literally worthless in regions where the quantity produced in the course of oil drilling exceeds the accessible market. In such cases, oil drillers simply "flare," or burn in the field, huge volumes of excess gas.¹⁸

In some cases, new pipeline projects will narrow these price differentials by providing a market outlet for the surplus gas of some producing regions and permitting some consumers to replace LNG with gas delivered by pipeline. However, constructing pipelines costs a great deal and they cannot reach every major market. For example, no pipeline will link Japan to the gas fields of Siberia in the foreseeable future.

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