CRISIS IN THE PERSIAN GULF : Natural Gas Industry May Reap Short-Term Benefits From Soaring Oil Prices

The beleaguered U.S. natural gas industry could benefit in the short term from the shock of soaring oil prices resulting from the Iraqi invasion of Kuwait, analysts say.

Though depressed gas prices have responded little so far to the Middle East crisis, they could rise as winter nears, particularly if oil prices remain high as expected.

But it is uncertain whether the current Middle East crisis will have any lasting effects on the natural gas industry. The underlying problems that have depressed the industry this year--excess supplies and slack demand--are likely to continue as the industry awaits its long-overdue recovery, analysts said.

Industry executives remain optimistic that a new focus on clean air and global warming will result in stronger demand for cleaner-burning natural

gas and that the current oversupply will evaporate. In terms of the energy equivalent, the United States consumed roughly twice as much crude oil as natural gas in 1989, according to figures from the Energy Department.

But for now, excess supply--what those in the industry call the natural gas “bubble”--persists. “It’s a lot bigger than most people think it is,” said Harry Quarls, vice president and natural gas analyst at the Booz, Allen & Hamilton consulting firm in Dallas.

Meanwhile, mild weather around the country last winter reduced demand for natural gas about 3% below levels a year earlier, said Monroe Helm, a gas analyst at the investment banking firm of Morgan Stanley & Co. in New York.

At the same time, large natural gas customers were able to buy surplus supplies earlier than usual to put into storage in anticipation of the next high-demand season this winter.

Gas prices fell to their lowest levels in about a decade, analysts said, and are now in the range of $1.35 to $1.45 per thousand cubic feet. In contrast, average prices peaked in 1984 at $2.66 per thousand cubic feet, according to the Energy Department.

Since the Iraqi invasion of Kuwait nearly two weeks ago, prices of natural gas have not jumped dramatically, as have those of crude oil or refined products. That’s in part because natural gas prices in the United States are based on supply and demand factors mainly involving North America, not the rest of the world.

“They’re relatively insulated from world events in the short run,” said Grant Wood, senior energy economist at Petroleum Industry Research Associates in New York.

But that could change. When the price of natural gas falls, relative to the price of its nearest competitor, residual fuel oil, industrial customers and electrical utilities switch from fuel oil to natural gas.

“The situation in the Middle East would help (natural gas producers) if there were some switching,” Helm said.

Some of that switching had occurred even before the invasion. By late July, low sulfur residual fuel oil was selling for about $18 per barrel in the Northeastern United States, roughly the equivalent of $2.50 per thousand cubic feet of natural gas at the wellhead on the Gulf Coast, according to the Salomon Bros. investment firm in New York.

By comparison, spot natural gas prices were about $1.45 per thousand cubic feet in southern Louisiana at about the same time, Salomon Bros. reported.

Petroleum Finance Co., a Washington consulting firm, sees average natural gas spot prices rising at least 6 cents per thousand cubic feet in October.

That’s not including anticipated seasonal price increases of about 8 cents per thousand cubic feet, beginning in September and October, due to cooler weather, the firm said. Demand and prices typically rise sharply during cold seasons.

But it’s uncertain how much more fuel switching will take place. Many customers have already switched, said Charles A. Jordan, general manager of natural gas supply and marketing at Chevron U.S.A., the nation’s largest producer of natural gas. And the largest users of oil--motor vehicles--generally can’t switch to natural gas.

“We don’t really see too many things that would change or be affected appreciably--at least in the near term--by the Iraqi embargo,” Jordan said. Some customers may buy more natural gas to top off existing supplies, he said. “But certainly nothing that will drive the price through the roof.”

It’s possible that the Middle East crisis could hurt the natural gas industry if it edges an already-weak economy into recession. Heavy industry and electric utilities, sectors that are particularly vulnerable to a recession, account for nearly 57% of natural gas use, according to Petroleum Finance.

SCAMS ON THE RISE: The state is warning consumers to be wary of con artists who are trying to capitalize on fears of escalating oil and gold prices. D5