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Commodity Investor Q&ABy Matt Badiali, editor, S&A Resource ReportWednesday, July 22, 2009 Q: Why do you suppose the Obama administration & Congress & the media ignore the very positive role that natural gas can play in moving the USA toward BOTH significant reductions in greenhouse gases AND energy independence? – R.M.
A: Thanks, R.M. That's a great question. Let's see... why would politicians choose expensive boutique energy sources over an enormous, inexpensive supply?
Because the lobbyists for solar and wind did a tremendous job.
Hats off to them. They convinced the public and the government that their power (which can be up to 40 times more expensive per kilowatt-hour and today supplies about 2% of our needs) can replace the 70% of power generated by coal and oil.
If wind and solar were the answer, we would have done it in the 1970s... But they aren't. Many have bought into the idea that solar and wind power are underutilized because the big power companies are out to screw us. But the truth is, these sources aren't competitive, even with a whole lot of environmental regulations plaguing coal-burning power plants.
The lobbyists won the battle by making some believe carbon dioxide (CO2) – a byproduct of burning coal – is equivalent to death in a can. As I've said before, the only carbon-free source of energy capable of meeting our needs is nuclear. But I don't want to play by the lobbyists' rules. There is nothing wrong with carbon dioxide – within certain limits. And there are ways to remove excess carbon dioxide. Nature has many... Plants turn CO2 into sugar and oxygen. Mollusks use dissolved calcium and CO2 to make their shells. Why aren't we funding the heck out research into that?
Don't worry... I haven't forgotten. Your question was about natural gas.
The cap and trade legislation will probably drive some power plants to natural gas in the short term. No "renewable sources" can shoulder the burden. So if coal becomes too expensive to use, natural gas will be the fuel of choice.
That doesn't mean you should jump into natural gas futures...
Today, we have 25% more natural gas in storage than we did a year ago, and we're nearly 19% over the five-year average. To make matters worse, we're producing more gas than we have since 1974. The U.S. pumps 1.8 trillion cubic feet per month, an enormous supply that – judging by the amount going into storage – isn't getting used up.
With such a glut, the fundamentals of a natural gas investment already look bad. But there's even worse news for natural gas bulls...
Washington is cracking down on "excessive speculation" in the energy sector. Earlier this month, the Commodities Futures Trading Commission actually prevented the U.S. Natural Gas ETF (UNG) from buying new contracts.
(It sounds to me like the government wants to bar the public from participating in the energy market through ETFs like UNG. I guess D.C. wants to make that the exclusive preserve of the big banks and traders.)
UNG reportedly accounts for 25% to 30% of the open contracts for natural gas futures and could be keeping natural gas prices artificially high. If the CFTC decides to limit UNG's volume in the future, it will probably remove supports for the price of natural gas. That could lead to a quick 5% to 10% drop in natural gas prices from here.
Good investing,
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