Wednesday, May 23, 2012

How natural gas stimulates the economy

Mark Perry has a post today which makes a very important point: thanks to new fracking technology, natural gas has become abundant and very cheap; this in turn has created savings of $350 billion for end-use customers over the past three years, many thousands of new jobs, and it promises to revolutionize manufacturing in this country in coming years. In short, one new idea (how to get natural gas out of shale) has allowed the U.S. economy to produce much more energy with a given amount of resources, and abundant and cheap energy has allowed consumers and companies all over the country to devote more of their scarce resources to other purposes. This is how jobs are created, not by increased government spending or artificially stimulating demand, but by producing more with less effort. Growth comes from increased production, increased productivity, and increased investment. As F. Say famously said, supply creates its own demand. I can think of no better way to illustrate why the supply-side view of how the economy works is better than the Keynesian demand-side view.


Here's an updated chart of natural gas prices. Prices are up this month, but are no higher than they were 15 years ago, and only slightly higher than they were 20 years ago. Oil prices, of course, are 4.5 times higher today than they were 20 years ago.


Relative to oil, natural gas prices have literally collapsed. Relative to oil, natural gas prices have fallen by roughly 80% compared to the late 1990s. We have only just begun to see the impact of this incredible development on the U.S. economy's ability to grow.

9 comments:

Gloeschi said...

Ask CHK how NatGas is stimulating them

djakel said...

CHK should be worth 3 to 5 times its current market cap in 1-3 years. It has been beaten down from $35 to $17 for many reasons, but primarily due to the current glut of NG inventories. Shut-ins are reducing supply and demand is increasing from several sources. As transportation converts to NG and LNG exports begin, NG prices will rise. In the meantime CHK is investing 90% of their 9Bil annual capex in oil & liquid plays.

Dr William J McKibbin said...

Cheap energy is good for essentially every economy, business, and family -- very good in fact -- and yes, fracking has opened new domestic sources for natural gas right here in the USA -more at:

http://marcelluscoalition.org/

- bravo for technology and innovation!

Rich Ghazarian said...
This comment has been removed by the author.
Squire said...

Innovation is the magic carpet to prosperity.

You would think the central planners would love to get on board with NG and find ways to get cars running on it.

Tom said...

If the environmentalists don’t shut us down, we are in the process of becoming the Saudi Arabia of natural gas. Since natural gas is a feedstock into many chemical processes, Louisiana (where I live) is looking at a manufacturing boom. I read in the local paper almost every week about plants in our chemical corridor either expanding or moving entire plants from foreign countries to here. When is the last time you heard something like that?

John said...

Bakers Hughes reports 6 more natgas rigs were shut down this week - a response to weak demand relative to the supply glut and low prices.

Squire raises the possibility of "cntral planners" promoting natgas as a transportation fuel. Sadly, Romney is keen on the Keystone pipeline and Canadian bitumen - a dirty imported fuel.

Flogistix said...

really interesting. . .thanks a lot for sharing. . I think biofuel is the best alternative gas....that was only my opinion . .
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