The roller coaster ride of the natural gas market in the last year has spawned a flurry of studies looking for possible market manipulation. The most thorough attempt I've seen is a recent study prepared for the Midwest Attorneys General Natural Gas Working Group representing Illinois, Iowa, Missouri and Wisconsin. The study concludes that there is no rationale for recent gas prices. Ergo, something underhanded must be going on. It is impossible to prove the gas market is not being manipulated. A thorough investigation that turned up evidence of illegal behavior would surprise no one. But, the domestic oil and gas industry has undergone radical changes in the last few years that few observers predicted. It seems that the irrational exuberance demonstrated by the market could simply be due to the failure to anticipate these changes. The most fundamental change is that the U.S. is now dependent on unconventional gas resources rather than the conventional gas deposits that we have been depleting for decades. The sad fact is that production from the old fat deposits in the Gulf region are now declining, a fact that industry and government analysts failed to predict (at least publicly.) Today, a significant fraction of U.S. supplies comes from gas trapped in coal deposits (coal bed methane), as well as highly compressed layers of sand (tight sands) and low-grade shale. To extract gas from these deposits, more drilling is required and much more sophisticated technology needed. Some analysts put the marginal cost of gas from these sources at $6\/MMBtu. Five years ago the marginal production cost was perhaps $1.5\/MMBtu. There are enormous reserves of these unconventional gases - a fact that the Attorneys General report played up. But so what? The problem is that unconventional gas is expensive to extract, not that there isn't a lot of it. The second salient change has been the price of crude oil. Some industrial users can switch back and forth between gas and residual fuel oil, so oil and gas prices are highly correlated. Historically, U.S, gas prices have been about 75 percent of crude oil prices on an energy basis. Crude prices are currently $10\/MMBtu, suggesting that the "right" price for gas would be about $7.50\/MMBtu. Today?s NYMEX gas price is lower than that due to the large amount of gas in storage, trading at about $7\/MMBtu. Due to the increased reliance on unconventional gas resources and rising oil prices - and perhaps hanky-panky by gas traders - gas prices were rising before the hurricanes hit the Gulf last fall. Then prices went crazy. But surely no one was surprised that TV pictures of sinking oil and gas equipment resulted in a large spike in the price of gas. The U.S. Minerals Management Service kept a weekly log of how much gas production was curtailed by the storms. No one was able to monitor how much demand was reduced. Thus, the story was entirely one-sided. As it turned out, consumption decreased more than production. It took the market several months to figure it out. Before long it corrected itself. Voters are angry over the price of gas and politicians love scapegoats. Thus, investigations are inevitable. Perhaps some villains will be found. But in my mind, the real culprits are the shills that continued to forecast decades of cheap gas just a few years ago. Undeterred by past failures, the same shills are saying that importing enough liquefied natural gas will bring back the days of cheap gas. Is there a pattern here? You betcha.