Special from Colorado Energy News and Richard Martin, Contributing Editor

As natural gas prices dip toward historic lows, the potential for gas reserves to provide a key future source of energy, cleaner than coal, looks less certain. “Natural gas prices tumbled again Thursday,” the Associated Press reported, “hitting new seven-year lows after the government reported more supplies were put into storage as the entire country pares down on energy usage.”

Natural gas has now plummeted to less than a third of its price a year ago,  and the decline seems to be accelerating: natgas contracts on the Nymex, the petroleum and metals exchange, lost nearly 23 percent last week.

So what’s not to like about cheap energy? Plenty, if you’re a producer trying to make money off it. At $2.50 per 1,000 cubic feet — the lowest price level since March 2002 — gas is simply uneconomical to produce and market. That’s not a good thing for an energy source on which some are counting to replace coal in the next 10 years as the No. 1 fossil fuel for generating electricity in this country. The price drop, and not the new regulations established by the Colorado Oil and Gas Conservation Commission, is the reason that “the number of drilling permits issued to drop 38 percent this year, compared to 2008,” as Colorado Energy News reported.

Even as the price of natural gas plunged, Gov. Bill Ritter’s new head of economic development was in Grand Junction to convince a group of skeptical business officials  that Ritter believes that gas can be a key fuel for his New Energy Economy. Ritter’s administration will seek a $10 million federal grant to dramatically expand the use of compressed natural gas to power state vehicles in Colorado, and is backing quick approval of the Ruby Pipeline, to bring natural gas from the Western Slope to the markets of the Midwest and Northeast, by the Federal Energy Regulatory Commission.

You can’t promote natural gas, though, if energy companies can’t make money selling it. Not only has demand dropped dramatically in the global recession, but the gas industry lacks sufficient infrastructure to moderate the supply it sends to the market. “Over the past 2 weeks, the impending gas price debacle has finally become clear to the market, as several major pipelines carrying natural gas from producing regions to the Northeast have issued imbalance warnings,” wrote Houston-based analysts for Raymond James last week, according to Oil & Gas Journal.  

“These imbalance warnings are a clear indication that the US is running out of gas storage capacity.”

 In other words, pumped gas that can’t be stored has to be sold, flooding the market and adding to the current glut. In that sense, the natural gas industry is hastening its own decline by producing gas it can’t sell for a profitable price. The good news is that the current gas glut is not going to last. This presentation, from energy analyst Euan Mearns on The Oil Drum, demonstrates that imports to the countries of Europe, among the world’s largest consumers of natural gas, are expected to rise sharply over the next two decades. Even in Russia, the world’s largest producer of natural gas, production is expected to flatten.

So, the U.S. should be investing millions in new capacity to transport and store natural gas – right? Unfortunately that’s not what’s happening. Though the U.S. is thought to have huge untapped reserves of natural gas, the current oversupply keeps energy companies from investing in new infrastructure; and the new federal energy policy, at least as exemplified in the climate change bill passed this summer by the U.S. House, is not going to help.

Despite “pronouncements that gas could be used to replace aging, inefficient coal-fired power plants — and reduce greenhouse gas emissions in the process — lawmakers from coal-producing states appear committed to keeping coal as the nation’s primary producer of power,” The New York Times reported – echoing complaints that the natural gas industry has not done enough  to influence energy policy in Washington, D.C.

Increased use of natural gas would be good for the industry in Colorado and Wyoming — and good for the country. It’s too bad that current price volatility, and shortsighted energy policy, could hinder that development.