You probably thought Extacy was the most popular drug of choice. I have news for you it is really Natural Gas. The by-product of the oil boom was thought to be commercially worthless and was flared off (burned on the site from tall poles) just to get rid of it for several decades. Gas was so cheap it was not worth collecting and selling. That is past history now and gas prices soared in 2008 as fast as oil.

When natural gas became the energy of choice in the 1980s it was cheap and plentiful. Gas pipelines began to dot the countryside as oil drillers found it was an ideal way to cover drilling costs on marginal oil wells. Since then over 100,000 miles of gas pipelines have been planted in the ground and almost every major utility uses gas to fire its electrical plants. 20% of our electrical generation now comes from gas. Gas is clean burning and easy to deliver to the furnace. No complicated process is needed to move heavy coal from the supply yards into the furnace. There are no smelly, dirty, acid emissions to deal with and no complaints from the neighbors from a plant in their neighborhood.

Unfortunately the number of gas fired electric generation plants has gotten out of control. With gas so plentiful and gas generation plants so easy to build they popped up in every corner of America. Now these plants are like so many leeches sucking the life out of the gas pipeline system. Each one draws the equivalent gas demand of thousands of homes and businesses to keep the electric lights on for our homes and offices.

The demand for natural gas is very close to exceeding supply. Several times during the 2006 winter Chesapeake Energy said the gas system was close to a shutdown. There was barely enough gas in the pipelines to maintain the pressure.

Country wide cold spells cause drains on the entire pipeline system. Regional cold fronts can pull gas from other areas of the pipelines to offset the demand. This is not a random occurrence. System wide demand is growing because the electricity generated by these plants is used to run/heat/cool a growing number of homes, offices, businesses and factories. With a growing number of these locations open 24 hours there is little time for pressures to rebuild.

Gas wells typically produce at maximum flow rates for only a short period of time with an average of only 24 months. Within 36 months the flow is drastically reduced. After five years most wells are either dry or producing at an insignificant rate. New drilling technology allows even faster flow rates with shorter production life cycles. According to numbers released at the recent Energy Conference in Denver there are more than 22,500 new gas wells drilled in the U.S. each year. Despite this frantic drilling the total gas production had fallen for the last two years prior to 2008. There was little hope on the horizon and we know how this movie will eventually end. However, the new shale plays have promise and theoretical reserves have exploded but until enough wells are drilled to prove out the technology and the reserves we need to be cautious about assuming gas will always be there. In a recent (10/2009) energy conference there was a big discussion on the rapid decline rate of shale gas wells. It appears most are not even repaying the drilling costs. That story is sure to gain traction as more well history is accumulated.

Natural gas has historically cost well under $4 per thousand cubic feet with rates in the $2-$2.50 range considered normal for many years. In July 2008 the futures contract passed $13. Many analysts are starting to believe that prices could have reached the $20 range before the arrival of shale gas. The problem was simply too much demand and too little gas. In late 2009 gas supplies have risen slightly thanks to that shale gas and prices have fallen to multi-year lows. This has forced over 1,000 rigs to be idled. This will impact production in the months ahead. It is always feast or famine in the drilling business.

Since many homes are heated by natural gas or by electricity generated by gas we are going to see utility bills double or even triple over the next decade. Many gas fired electric plants will be converted back to dirty coal but it will not be fast enough or in enough quantity to offset the rise in rates 5-7 years from now. There is no answer for gas as we are sucking it out of the ground faster than it can be replaced and that will never change for more than a few months at a time.

Where does that leave us? Since there is nothing we can do to significantly lower our utility bills other than turning off the heat the only remaining option is to invest in stocks that will benefit from the skyrocketing gas. That way every spike in gas prices produces an offsetting spike in our investments.