natural gas in the US: the “other” energy story

The US is now producing about 70 billion cubic feet of natural gas daily.  On a heat-equivalent basis, that’s equal to around 10 million barrels of oil.

When I was a starting-out energy analyst in the late 1970s, natural gas and crude oil sold for roughly the same amount per Btu.  In fact, in some instances, natural gas sold at a premium.  That hasn’t been true for a long time.  Up until July of this year, natural gas was selling for about $4.50 per thousand cubic feet (Mcf).  That’s the equivalent of $30 a barrel oil.

Why the huge price difference?

In the simplest terms:

–natural gas is a good substitute for oil as a heating fuel or for generating electricity, but it has made only small inroads in transportation, and

–because it’s in gaseous form, it’s harder to get from place to place.  Gas typically requires a pipeline, which is expensive and suffers from the NIMBY syndrome.

Even though the prices of crude and natural gas have going their separate ways for many years–with gas being consistently much cheaper than oil, natural gas, too, has had its own price collapse over the past six months.  Even at what should be a seasonal peak, natural gas is now going for $3.50 an Mcf (the equivalent of $23.50 a barrel), down by almost a quarter since summer.

The two price slides have one factor in common–an increase in production from hydraulic fracturing.  The other is mostly a gas thing–unusually warm weather in November and December  For what it’s worth, predictions are for continuation of the mild weather until spring.

The main effect of the natural gas price slide has been the obvious one–more money in the pockets of gas consumers.  But there have been several others.  Imports of natural gas from Canada are down.  Imports of high-cost liquefied natural gas (LNG) have dropped sharply.  The advantage that the EU’s petrochemical industry, which uses oil as its main feedstock, had achieved over its US counterpart, which uses gas, has abated.

my take

This is a situation where effects are asymmetrical.  The price decline is very bad for domestic natural gas producers. While it persists, demand for imported natural gas should be close to zero, although minimum “take” provisions of long-term contracts may force importers to buy at least some amount.  Bad for them, too, unless their customers ar contractually obligated to take the pricey stuff.

Because gas is hard to transport, this is a US phenomenon.

We use about 20 million barrels of oil in the US each day.  We use the equivalent of another 10 million in the form of natural gas.  On a dollar basis, though, gas amounts to only about 20% of overall hydrocarbon spending.  So the positive effect of the natural gas price decline will be much smaller than for oil and will be concentrated mostly in the Northwest and Midwest, where the weather is colder and where the pipelines terminate.