Buying Gas To Re-Sell Instead of Producing Gas To Sell

Abstract

Since deregulation of natural gas prices in the U.S. became fact, not just intent, producers have had to reckon with the progeny of market supply and demand. Long-term speculations abound regarding improved gas prices in the future. Short-term speculative opportunities arise due to seasonal price peaks. One way of acting on these speculations is buying gas for re-sale instead of producing one's own gas; the decision algebra of such speculations is treated here. Introduction When a balloon manufacturer and seller who makes balloons at a unit cost of $0.50 per balloon can, instead of making balloons, purchase balloons at less than $0.50 per balloon, his or her decision as a present value maximizer is simple. Stop making balloons; instead, buy balloons for re-sale! As a matter of fact that decision does not depend on the magnitude of the profit margin; if the balloons sold for a desirable high price of $10.00 each, the decision would still be the same as if the balloons sold for a disappointingly low price of $0.51 each. Let us now leave the simple decision world of balloon merchandising and consider a manufacturer, i.e., a producer of natural gas who sells what he or she has produced. Let the unit cost of gas production be c in $/MCF; let us also consider the producer has to maintain an office and staff at a fixed cost C in $/yr. As long as the gas can be produced at the rate, qc such that [qc(p-c)-C]>0, where p is the unit selling price in $/MCF, the producer would ordinarily continue producing. But now suppose the producer has the opportunity to purchase natural gas at some unit price, cx, and then re-sell the purchased gas instead of his or her produced gas. Should a present value maximizing (potential) producer shut-in or constrain his or her production and, instead, satisfy the market with purchased gas? The answer here is not so simple as that for the balloon merchandiser. The complication arises because each and every source of natural gas produced and sold is finite and exhaustible; on the other hand, balloon merchandisers can confidently plan that new balloons, what ever their sources, can be supplied without limit forever if they can be sold at profit. P. 351^