There’s no doubt America has an energy problem… or maybe you could call it a fossil fuel problem. All the fuels we’ve relied on since time immemorial are skyrocketing in price. (Dinosaur bones just don’t take the old gas tank as far as they used to — as we personally discovered yesterday filling up at $4 a gallon here in NV.)

The least harmful and most clean-burning fossil fuel, natural gas, is shooting up in price, too. The North American continent (both the U.S. and Canada) has been “running to stand still” for a long time now in terms of natural gas production. The rate at which new wells are coming on line is barely keeping pace with the depletion of old wells. And nor does it help that nuclear plants are looking a lot more expensive than first realized, or that natural gas and water are required in huge quantities to unlock the black treasure of Canada’s oil sands.

As a result of these and other factors, the time has finally come for the liquid natural gas (LNG) market. The world desperately needs to be able to ferry natgas from one continent to another — like crude oil — and LNG technology is the way to do it. BreakAway Investor editor Andrew Mickey is right on top of this trend. Take a look.

Selling Out to the Highest Bidder (for Natural Gas)

by Andrew Mickey, Editor, BreakAway Investor

“We are not in the charity business. Whoever will give me the best price, I will follow him.”

- Abdullah bin Hamad al-Attiyah, Oil Minister of Qatar

Qatar is already taking advantage of this situation. And they’re making no qualms about their motivation: make as much money as possible.

But Qatar is just one small player in the next monster trend in the energy business. The situation is getting bad, real bad. The profit opportunity, however, is just as big as the situation is bad.

Already Exxon Mobil, Merrill Lynch, BHP Billiton, and dozens of others are getting in on the action. Now, as we put all the pieces of this complicated puzzle together, you can take your piece of the action, too.

Decades in the Making

For decades we’ve heard it’s coming — a completely new source of energy. But I’m not talking about some economically questionable alternative energy source or something with numbers that only “work” with lavish government subsidies. I’m talking about liquefied natural gas, or LNG.

The LNG market has been on the verge of a major breakout, seemingly for years. But the numbers just never made sense. It has taken years of infrastructure buildup to lay the foundation for the industry. And with oil companies required to shell out at least $5 billion just to build an LNG plant, they just weren’t going to take too big of a gamble.

That, however, is all rapidly changing.

Exxon Mobil, Merrill Lynch and China National Oil Company have combined to commit $30 billion to investing in new LNG facilities over the next five years. BHP has committed $25 billion for new LNG facilities in Australia. Worldwide, LNG investments are expected to eclipse $100 billion over the next decade. Warren Buffett, Shell, BP and Gazprom are all betting big on LNG.

Together, they’re all helping to nurse the LNG industry from infancy to maturity in short order. And with all these companies placing huge bets, you can bet they’re laying the foundation for a major win.

But the LNG market is still in its relative infancy. As a result, most investors just don’t understand all the details… yet. But that’s exactly what is creating an opportunity in the next big trend in energy.

We’ve got to understand three aspects of the booming LNG industry in order to profit from this situation. First, we’ve got to look at the basic nuts and bolts of the industry (how natural gas is turned into LNG and so forth). Second, we’ve got to realize natural gas will finally become a truly global commodity and the highest bidder will get the gas. Third, we’ve got to find the bottleneck — and who has is developing the solution. And that’s where we’ll put our money.

Natural Gas Goes Global

The United States has been getting natural gas on the cheap for decades. Most natural gas consumers (primarily power companies and utilities) have been paying very low prices for natural gas compared to the rest of the world. Despite the recent doubling in natural gas prices, U.S. utilities can still buy it for around $11 per million BTU (MMbtu).

The rest of the world is paying much higher prices. Spain pays $13 per MMBTU, Korea and India pay $14 per MMBTU, and Japan pays the highest price of about $15 per MMBTU.

The cause of the wide price range is pretty simple. Natural gas is produced and consumed locally. For instance, natural gas in the U.S. is produced from a well and transported via pipeline to the end-user.

Although there are some fairly long offshore pipelines, building a pipeline across the Pacific or Atlantic Oceans is technically and economically unfeasible. As a result, Asian, European, African, Australian and North American natural gas prices can vary widely. There was no way to trade natural gas on a global level.

The growth of the LNG industry is already starting to change all that. Japan recently paid $19 per MMBTU of LNG and China and Europe are also paying top dollar for LNG. But they’re happy to do it. The price may seem high now, but the long-term LNG contracts these countries have signed will save them a lot more money as natural gas prices continue to rise over the long term.

There is no transparent market for LNG. The LNG market is made up of privately negotiated contracts between suppliers and consumers. That lack of transparency is helping to keep this boom quiet for the time being.

According to the most recent figures from the U.S. DOE, in January 2008, U.S. crude oil output was just over 5 million barrels per day, plus additional natural gas liquids. The balance of oil consumption comes from imports. (Also, the U.S. supply of transportation fuel is supplemented about 3-4% with ethanol that comes from distilling about half the U.S. corn crop. That is why your grocery bill is skyrocketing.)

But domestic volumes of oil output are depleting and declining inexorably. From the North Slope of Alaska to the deep water of the Gulf of Mexico, U.S. output is just plain falling. There is very little good news, and even the good news is oft-times not so good.

New discoveries and new wells just cannot keep up with depletion of older oil fields. By 2025, U.S. daily oil output will be a fraction of its current level (probably down to about 2-3 million barrels per day), even with an aggressive program of drilling offshore and in Alaska — which is not happening, in any case.

Also by 2025, U.S. imports will almost certainly decline. The oil will not be available to buy and import from world markets. Not everyone agrees with this. In one fanciful projection from 2005, the U.S. DOE forecast that “Total U.S. gross petroleum imports are projected to increase in the reference case from 12.3 million barrels per day in 2003 to 20.2 million in 2025.” Maybe in somebody’s dreams, but my view is that this is one projection that will never come true.

Really, by 2025, the rest of the oil-producing world will simply lack the product to export. This will be due to reasons of depletion on a global scale, and fast-growing internal demand in oil-producing nations. Gasoline consumption in places as diverse as Russia, Iran, Venezuela and Saudi Arabia is just soaring, so there is less net oil available for export.

And oil output everywhere is flat or declining. (Just last month, Russia announced a plateau in oil output.) And closer to home, Mexico’s Cantarell field is simply crashing at an annual depletion rate of 8% or more.

So what will happen in 2025? Will the U.S. pump its own oil? No, it’s not there. Will the U.S. continue to import large volumes? No, it won’t be available. The bottom line is that conventional oil sources for the U.S. — domestic output and imports — are simply drying up.

Until next time,

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!