Preliminary 2004 data available from the Department of Energy?s Energy Information Administration show that North American gas supplies continue to be strained. U.S. production declined 2.2 percent compared to 2003, despite average wellhead prices of $5.36\/MMBtu, a 10 percent increase over the prior year. In response to higher prices, 18 percent more gas was drilled, but production dropped nevertheless. Only a fraction of this decline was due to the effects of Hurricane Ivan. Imports from Canada remained flat, while imports of LNG increased 20 percent. Clearly, the depletion of North American gas resources is taking its toll, continuing to increase drilling costs and decrease yields. The California Energy Commission?s report released February 11, Natural Gas Assessment Update, has nice charts showing these historical trends, although their data have not been updated to include 2004 results. Meanwhile, on the demand side, consumption declined 0.7 percent in 2004. My model shows that all of this decline was due to reduced heating loads caused by mild winter weather. If heating loads had remained the same as in 2003, total consumption would have increased 1 percent. Industrial and other consumption unrelated to weather increased marginally despite higher prices. EIA now projects that gas prices will fall to about $4.50\/MMBtu by March, but this seems unlikely. Supplies are already tight, and recent trends indicate that they are getting tighter. A major price reduction would depress drilling activity and production while also spurring consumption, thereby exacerbating supply shortages. I expect prices to remain at current levels for the next few months and move even higher if supply trends continue downward.