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Published: Sunday, 12/4/2005

Will natural gas prices ignite a recession?

BY MARY-BETH McLAUGHLIN
BLADE BUSINESS WRITER

Ask what is the best way to make sure that rising natural gas prices don't derail the national economy, and experts have a less-than-scientific answer: Keep your figures crossed for a mild winter.

Otherwise, homeowners and renters will pay even more than the $300 average increase expected this year to heat their homes. And firms that use the fuel as a power source or in their production will be forced to close plants and lay off workers.

"Every recession has been led by a run up in energy costs," said Kevin Swift, chief economist of the American Chemistry Council in Virginia.

"It's mostly been because of oil, but this may be the first time it will be because of natural gas costs."

It will be a warmer-than-normal winter throughout much of the country, but cooler than last year and colder along the East Coast, where there is high natural gas usage, according to National Oceanographic and Atmospheric Administration.

With natural-gas demands expected to be about at last year's levels this winter and with supplies lower, the pinch will come if the temperatures in certain states are colder than anticipated. If so, that would boost demands on supplies partly diminished by the recent Gulf Coast hurricanes, and could further boost the rates and monthly bills for customers.

Companies also are feeling the pressure. Several in the Toledo area, including Owens-Illinois Inc., Cooper Tire & Rubber Co., and Dana Corp., have lowered profit expectations because of expected higher energy costs.

North Start BlueScope Steel LLC, which runs a minimill near Delta, Ohio, predicted it will pay $10 million more this fiscal year to help fuel electric arc furnaces and to keep slabs heated as they roll through the mill.

A survey of small-business owners in Ohio, released late last week by the local chapter of the National Federation of Independent Businesses, found energy costs to be a big concern, so much that, for the first time this year, the number of owners who think business conditions in the state will deteriorate outweigh those who think conditions will improve.

"Obviously it's something that everybody's been worried about and continues to be worried about," said David Altig, vice president and associate director of research for the Federal Reserve in Cleveland.

Still, he and other economic experts expect natural gas prices to throw the economy into the dumper, or even derail what some call an expanding economy.

The 3 trillion cubic feet of gas now in storage should be enough to carry the country through this winter, according to the Natural Gas Supply Association. That amount is slightly lower than the 3.3 trillion stored last winter.

The economy has been able to weather in recent years a number of energy shocks, Mr. Altig said, including high prices on oil and gasoline prices that this summer went over $3 a gallon.

"It seems manageable," he said of the increasing natural gas prices.

American households that heat with natural gas will spend an average of $306, or 41 percent, more for fuel this winter than last year, according to the U.S. Energy Information Administration. "Should colder weather prevail, expenditures could be significantly higher," the agency's November report predicted.

Sectors likely to be hardest hit, besides individuals, are retailers and the service industry, as people curb spending on nights out at restaurants, weekend trips, and extra shopping trips to the mall, experts said.

"If people are faced with gas bills that could be $150 or higher each month, they obviously will have to find that money somewhere," said Phil Thompson, assistant professor of economics at Central Michigan State University.

"It's going to come out of spending on the not-so-necessary things."

Richard Moody, vice president and senior economist of PNC Financial Services Group in Pittsburgh, said businesses using natural gas will be hurt financially, especially if they cannot pass along higher energy costs to their customers.

"The impact is going to be something that we will definitely notice, but it's not going to cause the economy to stop in its tracks," he said.

But the chemical industry is nervous, Mr. Swift said, because it is the largest industrial user of natural gas, using it for fuel and power as well as raw materials for production of thousands of items. The industry sector has lost more than 100,000 jobs in the last five years as plants have been forced to close because of the rising natural gas prices, he said.

"Our companies are very concerned," Mr. Swift said.

The problem was created by several factors. Gas well exploration virtually dried up in the 1990s in part because wholesale prices for the fuel were so low there was little profit in finding new supplies.

Then, there was a flurry of new stand-by power plants to help meet the nation's summer electricity needs, and those plants generally are fueled by natural gas, which gobbled up supplies during warm months when the industry historically was stockpiling for the next winter.

And finally, hurricanes Katrina and Rita in the past two months disrupted many natural-gas supply operations, further crimping available amounts and limiting replenishment of storage facilities.

Forty percent of the nation's energy needs are filled by oil, but natural gas now accounts for 24 percent, and such growth is causing woes, said energy expert Bill Daugherty.

"There are some serious problems with our natural gas supply," said the chief executive of Daugherty Resources in Lexington, Ky. Part of it has to do with geographic areas deemed off limits to drilling for new supplies.

"If we like turning the switch on and the heat up, we're going to have to look hard at new areas for drilling that are currently off limits," he said.

Eric Stephens, a government affairs director for natural-gas supplier Direct Energy Services LLC in Columbus, said, "At least for the short-term, prices are going to continue to be high and volatile."

To new residential customers in the Toledo area, Direct Energy's fixed rate is $1.45 per 100 cubic feet of gas, with a three-year contract. That compares with a rate from Columbia Gas of Ohio of $1.29, which is within 3 cents of the highest price it has ever charged.

The winter temperatures will dictate whether an energy crisis emerges.

As William Poole, president of the Federal Reserve Bank in St. Louis recently told the New York Times, natural gas prices are the biggest short-term risk to the economy.

"If we have a cold winter, we may find ourselves with an unpleasant crunch," he said.

Contact Mary-Beth McLaughlin at: mmclaughlin@theblade.com or 419-724-6199.



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