Tuesday, March 27, 2012

Natural gas is becoming incredibly cheap

Forget the collapse of the housing market, this is much bigger news. It's the most dramatic change that is happening beneath the surface of the U.S. economy today. As the rest of the world struggles with oil prices that are very expensive both nominally and in real terms (see chart below), the U.S., thanks to new tracking technology, is enjoying the fact that natural gas prices are plunging. Even as crude oil prices have surged over the past 13 years from $12/bbl to over $100, the price of natural gas in the U.S. is roughly unchanged on net. That means (as the second chart above shows) that natural gas has dropped by an astounding 85% relative to crude oil. We've never seen anything like this. The U.S. now enjoys an incredible energy price advantage that not only is transforming industries (for example, it shouldn't be too long before we start seeing cars that run on LNG), but that should be an important source of growth for the entire economy. This could be the best reason to be bullish.


Benjamin Cole said...

Not sure natural gas prices are "cheap."

Man (in the private sector) becomes better at resources extraction, every year.

Oil is an anomaly, as the world's supplies are locked up in monkey-thug states, such as Venezuela, Mexico, Russia, Iraq, Iran, Libya, Saudi Arabia, Nigeria etc etc.

This is really bad luck.

Natural gas are prices are about where they were in the 1990s. Not so cheap. Could get cheaper as the private-sector gets even better at what it does. More for less every year.

It is in the public sector, that less is done with more every year, in both social and military bureaucracies.

William said...

Already happening.

Utah is a state which has and is installing natural gas distribution stations for vehicles. It is the only state where Honda sells a Civic model which runs entirely on natural gas.

Anonymous said...

Forget the cheap natural gas. Look at my comment (first one) on Mark Perry's blog and browse through the link. Billions and billions of dollars in infrastructure projects are being thrown around Ohio like it was nothing.


Benjamin Cole said...

BTW, there have been huge---really huge---natural gas strikes globally as well. See the latest in East Africa. Some countries, such as Thailand, already have switched large fractions of vehicle fleet over to CNG and LPG. CNG and LPG are common there.

John said...

The U.S. is very slow getting around to NG conversion for transportation. In a free market, the world beats a path to the door of the maker of the "better mouse trap." I suspect the oil lobby, and the defense contractor lobby are blocking way.

Benjamin Cole said...

Natural gas prices went up in tandem with oil prices, and oil prices went up as there is no free market n oil (see above comments---monkey-thug nations control oil supplies).

That said, natural gas is closer to free market. So, when prices went up, supply was incentivized.

George Gilder predicted such occurrences, and is one reason Gilder says to no worry about commodities booms---they have seeds of their own correction.

Oil is a toughie, with supply contracted by man, not geology. Even so, we may see oil gluts in a few years.

Within 10 years, I think PHEVs become commercially viable.

jj said...

I've been asking myself lately if the nat gas producers today might be what the banks were in '08/'09 and how best to play it. Thoughts?

Gloeschi said...

Scott, you would even see a bullish sign in a dead pigeon that happened to fall on your drive way.
LNG terminals take time to build (environmental concerns, hostile local population, costs $1bn+), but eventually they will be built. LNG will then be exported to higher priced markets in Europe, and the time of cheap NG for US will be over.

Scott Grannis said...
This comment has been removed by the author.
Scott Grannis said...

But as you say, it takes time to build export terminals, and to build enough of them to equilibrate prices here and overseas might take many years. Meanwhile, fracking technology is being deployed all over the world, so I would expect global natural gas production to increase. So I think there is a case to be made for natural gas to remain very cheap for a long time.

William said...

The best way to play natural gas is the oil service companies which perform the high tech fracking: Baker Hughes (BHI), Halliburton (HAL), Carbo Ceramics (CRR) and Complete Production Services (CPX).

They are off their highs because the major natural gas producing companies like Chesapeake Energy Corp (CHK), Conoco Phillips (COP), Encana Corp (ECA) and Southwestern Energy Co (SWN) are shutting in wells and cutting back on drilling because the price of natural gas is too low - unprofitable.

jj said...

Thx William, will check out the oil service companies.

Public Library said...


Crude oil prices are only rising in terms of fiat currencies. As you point out rightfully so, we are far more efficient at using oil today compared to 10/20/50 years ago.

The only difference is the amount of dollars in circulation today. Yes there is some speculation and fear in the price of oil, but the majority of the price increase comes from inflation via money printing.

This is the same force that drives up the price of bread even though we are a thousand times more efficient at producing it over time.

The natural gas abundance will succumb to the central banks insatiable appetite to print fiat currency. It is only a matter of time, not when. Until we honestly discuss the root of the problems, we are all simply trying to avoid the bookends of calamity.

And the more time we spend trying to avoid the calamity, the less energy we spend building "real" things to move our economy and country forward in a healthy manner.

Bartholomew said...

Nice blog
Cheap Fiat For Sale

Unknown said...
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