Natural Gas: One of the Great Profit Opportunities of Your Lifetime

The story of how to make money in energy stocks begins with some headlines I've recently seen:

"Falling Natural Gas Prices Haven't Affected Stocks (Yet)"

"Natural Gas Inventories Not Pressuring Supply in Meaningful Way"

"Natural Gas is Running Out of Steam"

Looking at those headlines, you'd think natural gas would be a terrible investment these days. Or maybe you'd just think it would be boring and not worth your time.

You'd be wrong. Today, natural gas is one of the great profit opportunities of your lifetime.

For starters, the headlines conveniently fail to mention that natural gas is a valuable, useful commodity that's in high demand...

It's getting harder and harder to find a building in the United States that doesn't use natural gas. More than 60 million homes use natural gas. And roughly 70% of all new homes are outfitted with natural gas lines. Natural gas is used in 78% of all restaurants, 73% of motels and hotels, 51% of hospitals, 59% of offices, and 58% of retail buildings.

Natural gas isn't just for heating and cooking, either. Natural gas is the fastest-growing electricity fuel in the United States. Roughly 90% of all power plants built in the last five years use natural gas.

Electricity consumers like natural gas power plants because they generate cheaper power. Electricity producers like natural gas plants because they create less carbon-dioxide and nitrogen-oxide than any other fossil fuel. That keeps environmental regulators off the power company's back.

The U.S. Department of Energy says natural gas "consumption is growing at a faster rate than for any other primary source of energy." Natural gas is just too efficient, clean, and relatively cheap not to use.

Many industries rely on natural gas as an energy source for manufacturing. Just take a look around the house, and you'll see dozens of products that depend on natural gas. It's the dominant fuel for manufacturing pulp and paper; refining metals and petroleum; and processing stone, clay, glass, and food.

Natural gas is more than an energy source. It's a primary raw material for producing chemicals, plastics, and fertilizers. For many of these products, no viable alternative to natural gas exists.

Over the last 10 years, our society has become increasingly dependent on natural gas. Since 1996, demand has doubled in the United States. And here's where the story really takes shape...

Though demand has soared, production hasn't increased fast enough. Since 1996, domestic natural gas production has stagnated, growing at less than 1% per year. When it comes to commodity investments, increasing demand and stagnant supply is a perfect recipe for quickly doubling your money.

Don't get me wrong. The continental United States has more than enough natural gas deposits. Domestic gas supplies are estimated at 1,475 trillion cubic feet. That's enough gas to meet current demand for more than 67 years.

Sure, we have the gas in the ground. But pulling it out is a different story. Natural gas production hasn't kept pace with demand because it's not politically acceptable to drill in many areas rich with natural gas. Washington has limited the supply by preventing the development of new natural gas deposits. Without this government intervention, we'd have plenty of supply.

The U.S. government has established bans on drilling offshore on both coasts and the eastern Gulf of Mexico. The current bans are effective through 2012, but Congress could easily extend the bans when 2012 comes around.

According to figures gathered by the American Petroleum Institute, U.S. government restrictions block access to approximately 200 trillion cubic feet of natural gas. That's enough natural gas to heat more than 100 million homes for 30 years, and all of it is off limits.

And even when a company buys a lease to develop a natural gas field, it still might not be able to begin drilling. For example, oil and gas leases on federal lands have to comply with the National Environmental Policy Act, the Clean Water Act, the Clean Air Act, the Endangered Species Act, and many other laws and regulations. Even then, environmental groups can bring lawsuits that prevent drilling.

If we were talking about oil, none of these domestic issues would be a problem. You can ship oil anywhere around the world in tankers. But since natural gas is usually a gas, you can't do that.

Sure, small amounts of liquefied natural gas are imported from Algeria, Egypt, Nigeria, and Trinidad. But liquefied natural gas is a new, expensive technology. It won't have a big impact on the U.S. natural gas supply for many years.

Because of high demand and restricted local supply, the United States is able to produce only about 83% of the natural gas it uses. It imports the rest through pipelines from Canada and Mexico.

The bottom line for investors is crystal-clear: The overall market for natural gas couldn't be any better – demand is high and supply is limited.

A little more than three years ago, I recommended shares of Canadian natural gas producer EnCana to subscribers of Extreme Value, and we're already up 200%. Simply put, no company in North America can match EnCana's valuable land holdings, which total 27 million acres of prospective natural gas discoveries.

I still believe natural gas producers – and the companies that help them produce – will make investors a lot of money in the coming years.