Friday, June 3, 2011

Natural gas has become a very cheap and abundant source of energy


Yesterday I stumbled across an interesting article in Salon entitled "Everything you've heard about fossil fuels may be wrong." The thrust of the article was to highlight the huge increases in proven and exploitable reserves of natural gas that have been discovered in recent years thanks to "fracking" technology, and what this means to the search for alternative energy sources and U.S. energy independence.

As everyone who follows news about energy knows by now, in the last decade the technique of hydraulic fracturing or "fracking," long used in the oil industry, has evolved to permit energy companies to access reserves of previously-unrecoverable “shale gas” or unconventional natural gas. According to the U.S. Energy Information Administration, these advances mean there is at least six times as much recoverable natural gas today as there was a decade ago.

So I thought it would be interesting to compare the relative costs of natural gas and crude oil as sources of energy, and produced the chart above. What it shows is that since 2003 the price of natural gas has fallen from the equivalent of about 20 barrels of crude per 10,000 BTUs, to less than 5 today. In other words, natural gas has become 75% cheaper relative to crude oil in the span of just eight years, thanks to huge increases in natural gas supplies. (Natural gas futures traded around $5-6 per million BTUs in 2003 and today trade around $4-5, while crude oil has soared from $30/bbl to $100.)

This indeed has enormous implications for future energy use and industrial development. It isn't often that we see such huge changes in relative prices that have such a huge potential for changing the way our economy works.

11 comments:

Burt said...

Just wait. The industry is getting better at producing more viscous hydrocarbons from shale. Large amounts of oil shale production will bring the ratio back into line.

Scott Grannis said...

Good point, and that means that energy is going to be a lot cheaper in the future than it is now. Good news for the economy.

John said...

The energy return on energy invested in oil shale and tar sands is very poor.

Both fracking and oil shale require large quantities of water and create wastewater that has to be treated or injected.

Still, Boon Pickens is right, we should be using a lot more natural gas for transportation. What's the hold-up? S'pose the oil companies have something to do with it?

brodero said...

Aren't we considered the Saudi Arabia of Natural Gas???

Dr William J McKibbin said...
This comment has been removed by the author.
Dr William J McKibbin said...

The Marcellus Shale natural gas projects here in Pennsylvania are transforming many old coal towns into vibrant commerce centers supporting the emergence of this emerging industry -- more at:

http://geology.com/articles/marcellus-shale.shtml

Yes, natural gas prices are declining nationally. However, proposed gas severance taxes in Pennsylvania could force natural gas prices to rise sharply, so vigilance by anti-tax interest groups is vital -- more at:

http://statejournal.com/story.cfm?func=viewstory&storyid=94092

"Just say no" to new state severance taxes on natural gas!

Cabodog said...

Stating that although there are only 50 electric vehicles in Oregon, the state moves ahead with spending almost $1mm to install vehicle charging stations along I-5.

Drive 100 miles and then wait 30 minutes while your EV gets charged. Yeah, right. This sounds like a great investment for our country!

Why aren't we pushing natural gas vehicles instead?

http://www.businessweek.com/ap/financialnews/D9NJ8EUO1.htm

aldom said...

I don't understand the "X" axis, Barrels per 10,000 btu

I understand that Natural Gas has gotten very cheap relative to Oil, but this metric mystifies me.

Mis labeled?

Scott Grannis said...

aldom: the units for the y axis result from dividing the price of natural gas ($ per mil. BTU) by the price of crude oil ($ per barrel) and multiplying by 100.

Douglas said...

I hate to burst your (gas) bubble, but it is true that the eroei for shale-gas and tar sands is poor and on "oil"-shale is poor to negative. Also there are serious environmental concerns about the fracking process... of course, if your drinking water is not contaminated, why should you care?

And don't be so wildly enthusiastic about lowering the price for the energy resources you talk about because if it goes too low it ain't gonna pay to drill baby drill.

And you should beware of the hype about the quantities. The press generally picks the upper end of the stated possible reserves to crow about and doesn't differentiate between the different degrees of probability of recovery. The picture is always rosey... until it isn't.

Every respectable agency dealing with energy is giving out warnings about supply v. demand as well as absolute supply, even those agencies with political restraints on how close to the true reality they can go without scaring their patrons.

You can find an alternate viewpoint on natural gas here: http://www.theoildrum.com/node/7912 and if you scroll down in the comments to the comment of "Rockman" you will see that his company is not in Shale Gas because it is not profitable. Just a bit of his excellent comment:
"...Now the economic factors. You covered [th]is very well IMHO. But let me now apply a sledge hammer. The SG pays are not driven by the profitability potential of the wells…never has been and never will be. My company isn’t in the SG plays because they don’t provide enough profit. It’s really that simple. We aren’t in business to provide the country with energy independence. We don’t care if Yankees freeze in the dark without our efforts. Remember we are those heartless lying bastards everyone talks about. Most importantly we don’t give a crap about what Wall Street thinks about our operation…We’re not a public company. We make a much better profit drilling conventional NG. It’s just that simple. My company exists solely to make a profit and the best avenue for that is not the resource plays. We were created strictly because of PO.[Peak Oil]..."

Scott Grannis said...

Douglas: Nobody is going to produce gas if it costs more to produce than it returns. But the evidence suggests that a lot of new gas is coming to market, because the relative price of gas has dropped considerably since shale gas production started rising. Therefore the eroei on gas must be quite attractive.