If you think oil prices are too high now – at $100 a barrel – it’s time to adjust your thinking.

Truth be told, I don’t think we’ll see sub-$100-a-barrel oil ever again.

That’s not great news for U.S. consumers. But it could be great news for U.S. investors, because this new era of always-high oil prices is going to open the door for liquefied natural gas (LNG).

[ad#Google Adsense]Investors who accept this new oil-price reality – and position themselves accordingly – can settle back and enjoy the ride: As oil prices soar, expect LNG prices to zoom in tandem.

The Lowdown on Liquefied Natural Gas (LNG)

If you want to cut to the chase and see why I’m confident in my outlook for liquefied natural gas, I can provide two compelling reasons that I see LNG prices heading higher (see accompanying graphic).

Reason No. 1: The U.S. Energy Information Administration (EIA) expects oil prices to remain above $100 for at least the next two years. But my research tells me we may never see sub-$100 oil prices again. Ever.

And that’s because of the second reason …

Reason No. 2: As long as oil stays above $100 per barrel, oil-producers who are part of the Organization of the Petroleum Exporting Countries (OPEC) cartel will collect north of $1 trillion annually, according to the International Energy Agency (IEA).

This advance look at a future dominated by high oil and gasoline prices is almost enough to make you dash over to your local auto dealer to buy a Toyota Motor Corp. (NYSE ADR: TM) Prius or a Nissan Motor Co. Ltd. (PINK ADR: NSANY) Leaf.

But don’t despair: There is one energy source that’s about to reap the benefits of an escalation in oil prices, as consumers begin their switch to a cheaper – but still viable – alternative.

And that energy source is liquefied natural gas – often referred to as “LNG.”

LNG: America’s “Coolest Clean Fuel”

Most people have preconceptions about nearly everything – even LNG.

Liquefied natural gas is just natural gas in liquid form, the same stuff more than 63 million Americans use daily.

It’s converted into a liquid state by cooling it to -260° Fahrenheit (perhaps part of the reason that the Center for Liquefied Natural Gas (CLNG) trade group refers to LNG as “America’s coolest clean fuel”).

That cooling process also reduces the space the LNG occupies by more than 600 times – or roughly what it would take to shrink a beach ball to the size of a ping pong ball. When it’s in a liquid state, natural gas is much easier to transport.

For more than 50 years, LNG has been imported into the U.S. market for use as a fuel that will generate electricity, heat and cool homes and offices, cook meals, and a whole lot more.

And it does all this without causing major accidents, and without creating any major security concerns.

Liquefied natural gas isn’t stored under pressure, and its vapors are not explosive – even if they mix with air – unless there’s a source of ignition. LNG is odorless and isn’t toxic or corrosive. In fact, if we look at it from an environmental standpoint, it really is the “clean fuel” that the CLNG trade group claims: Should a leak or spill occur, liquefied natural gas just evaporates quickly, without leaving any residue.

And once it’s been converted back into gas form, LNG produces low emissions when it’s burned.

So we know that this is a safe, proven fuel. But is it cheap, and is there demand?

It’s only by answering those questions that we can determine whether there’s a good investment case for liquefied natural gas.

Why Natural Gas Prices Must Rise

Natural gas competes closely with coal as fuel to generate electricity. Nearly 25% of all the energy used in the United States comes from natural gas. Between 1999 and 2009, natural gas typically cost more than coal. In 2010, however, coal leapfrogged natural gas, making “natty” the cheaper option. That differential continues today.

At its current price near $4 per thousand cubic feet (mcf), most natural gas producers are losing money, as they need $4.50 or better to keep the lights on. Many shale plays need even higher prices. So extended low prices are causing supply to gradually fall off.

But these same technological advances that make shale production possible have expanded America’s energy reserves exponentially, perhaps helping to explain the current state of the oil-to-gas ratio.

Over the past decade, the oil-to-natural-gas ratio has typically hovered in the 6-to-1 to 12-to-1 range.

Before global financial panic of 2008, that ratio was in the 10-to-1 to 12-to-1 range.

Before 2009, you’d have to go all the way back to 1990 to see this ratio spike above the 20-to-1 level. And that quickly corrected, netting serious profits for those who grasped the anomaly.

Today, that oil-to-natural-gas ratio has soared to 26-to-1.

That means utilities have begun switching to natural gas, which is much cleaner to burn than coal, and helps lessen the effects of pollution and greenhouse gases. Legislation pushing for lower emissions is helping to make natural gas more attractive, too.

Those are all great selling points for natural gas – both as a fuel and as an investment.

But there’s one factor that makes liquefied natural gas an even-more-alluring investment than conventional natural gas.

The Key to Liquefied Natural Gas Profits

The reason LNG has exciting potential is this: Natural gas is shipped mainly through pipelines – meaning that it’s traditionally been a “regional” product … at least until now.

But the development of liquefied natural gas – and advances in transportation – will make it possible for LNG firms to look much further afield.

By converting the natural gas into a liquid form, it can be economically shipped overseas to awaiting customers, willing to pay a world price that’s much higher than the current (and largely “regional”) U.S. prices.

Current European prices are near $11.30 per thousand British Thermal Units (mmbtu), and spot Asian LNG is in the $11 to $12/mmbtu range, as well.

And that’s before we even consider Japan.

In the wake of the devastating earthquake, tsunami, and nuclear-power disasters that struck Japan last month, the Asian stalwart will embark upon a rebuilding campaign that some experts say will cost $300 billion or more.

On the energy side, it’s likely that the damaged nuclear reactors will never be restarted. With summer approaching, the country faces serious energy deficits, with no clear way to make up the shortfall, according to recent news reports broadcast by the worldband (shortwave) broadcasts of NHK/Radio Japan International.

Already, Japan is the world’s largest LNG importer. Natural gas meets 12% of the country’s needs, with over two thirds being consumed for power generation, according to a recent Platts report. More than 95% of that is in the form of liquefied natural gas.

The energy shortfall created by the damage to the nuclear power plant will have to be addressed, and quickly. LNG is a top candidate to close that gap.

Moves to Make Now

Already, two liquefaction plants are in the works, one at Sabine Pass in Louisiana, by Cheniere Energy Inc. (AMEX: LNG), and the other by Freeport LNG Development LP on Quintana Island in Texas. Both of these could be operational by 2015, initially exporting as much as 2 billion cubic feet daily of liquefied natural gas from the United States.

Cheniere operates in three business segments: natural gas pipelines, LNG-receiving terminals, and LNG and natural-gas marketing.

Sabine Pass has plans for four new production lines, each capable of processing up to 3.5 million tons of the liquefied fuel per year.

Cheniere has already recently signed three “memoranda of understanding” agreements that would have it export the liquefied natural gas from its Sabine Pass facility. And these potential clients are large-scale trading companies, EDF Trading and Sumitomo Corp., and large scale end user utilities Endesa SA and Enel SpA.

Right now, Cheniere has no earnings, and may not generate any for at least five to six years – a factor that adds to the risks that investors face. However, as natural gas from oil-shale deposits continues to grow in production, it’s likely that oversupply will look for a new home, especially at much higher global prices than in the U.S. market.

With its own massive supplies and lower domestic demands, Canada took the first step toward LNG exports. The Kitimat LNG terminal in British Columbia is being converted into an export hub. Its supply source will be the large scale Montney and Horn River Basins of British Columbia and Alberta.

Kitimat LNG is a producer-owned export facility whose initial annual capacity will be 5 million metric tons. The operator will be Apache Corp. (NYSE: APA), and ownership will be shared between Apache, EOG Resources Inc. (NYSE: EOG), and EnCana Corp. (NYSE: ECA).

Although these are slightly less direct plays on the predicted LNG-export surge than Cheniere, there is also less risk. Of the three, my favorite is Apache, due to its lower current and estimated Price/Earnings (P/E) ratios. Apache also boasts great international exploration-and-production exposure, making it less dependent on any one area. Finally, Apache’s international bases could provide great potential for management to develop LNG-export prospects.

In the end, it’s clear that OPEC producers are not going to give up their $1 trillion in annual revenue all that easily.

And with U.S. natural-gas prices at only one third those in Europe and Asia, plus strong-and-growing demand outside America, the current setup is very conducive for liquefied-natural-gas exports from the U.S. market being sent into these other higher-priced, higher-demand markets.

So with crude prices at 30-month highs, and no reason to believe that we’ll see oil drop back below the $100-a-barrel level anytime soon (if ever, in all honesty), the LNG/crude-oil arbitrage trade is clearly gaining momentum.

It’s time to make your move.

— Peter Krauth

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Source:  Money Morning