Why U.S. Natural Gas Prices Won't Stay Down
Looking strictly at the energy content, the price of a barrel of crude oil should be about six times the price of 1,000 cubic feet (1 mcf) of natural gas. A gallon of gasoline would cost about 0.13 times as much as 1 mcf, or 1.3 times the price of a therm (100 cubic feet).
Those cost relationships remain roughly true in most of Asia and Europe (where natural gas sells for about $15 per mcf), but in the United States, oil prices have floated around $100 per barrel while natural gas prices have fallen to near $2 per mcf, a ratio of 50 to 1. In my neighborhood right now, a taxed and delivered gallon of gasoline or diesel fuel is about $4, while I can buy the equivalent energy in natural gas at the meter for about 60 cents.
The low price is cutting natural gas-saving efficiency and weatherization project paybacks off at the knees. It's also destroying balance sheets on solar and wind projects, whose economics are largely determined by the margin price of electricity produced by natural gas-fired peaking power plants. And natural gas is offering a cheap, relatively low-carbon alternative source of energy for companies that might otherwise look to renewables to reduce their greenhouse gas emissions.
But low natural gas prices won't last, because way too many folks are making far too many plans to cash in. Raising demand alone will support higher prices, and some of those new and increased uses will also tighten the supply:
First, U.S. natural gas prices are low compared to oil right now partly because much of U.S. gas production is a byproduct of oil production. Oil has a global market, and the high global price of oil is supporting relatively expensive extraction techniques in the United States. The accompanying gas is captured wherever there is a suitable transportation infrastructure (elsewhere, it's flared). High oil prices are still as much a product of speculation and politics as supply-and-demand, and if oil prices fall enough to reduce U.S. oil extraction, I expect natural gas prices to rise.
Second, while the United States has no significant infrastructure for exporting liquefied natural gas (LNG), such infrastructure (liquefying and shiploading facilities) would not take long to build. But the competition from Russia, Quatar and Australia for exporting LNG to Europe and Asia is tough, so I don't expect them to take a large part of the U.S. supply.
However, there are other ways to export natural gas. One is to use it to improve yields and lower costs of refined oil products, which the United States exports in huge quantities every day. A second is to make products such as chemicals, fertilizers and polymer feedstocks that are readily exported. Another is to use it to economically produce energy-intensive products for export – today's U.S. natural gas prices are cheaper than China's.
That energy can be electricity – Bloomberg says the current natural gas glut has cut electricity costs for the U.S. power industry in half since 2008, with prices in the largest U.S. wholesale market declining from $87 per megawatt hour in the first quarter of 2008 to about $39 by December 2011. Since then, the price of natural gas has fallen another 20 percent.
Third, there's a growing movement to use compressed natural gas (CNG) for motor fuel, which will both increase gas usage and reduce oil demand. CNG for transportation has been held back by a lack of fueling stations and a limited selection of rolling stock (Honda Civic Natural Gas, anyone?). Both issues are being addressed.
For example, near Ground Zero for shale gas, Philadelphia, Pennsylvania has six public-access CNG stations, 12 private stations and four new stations in the planning stage. Down the road, Pensylvania has one public access station, 10 private stations and seven stations planned. U.S. natural gas suppliers are looking to partner with governments and the trucking industry to provide a network of CNG refueling stations like Europe's "blue corridors."
Meanwhile, U.S. and European truck manufacturers are relieving inter-station range anxiety by adding bi-fuel models that can run on diesel or liquefied/compressed natural gas. The Volvo FM MethaneDiesel is powered by up to 75 percent liquefied gas. Chrysler Group plans to build 2,000 heavy-duty bi-fuel trucks by this summer that will run on diesel fuel or CNG, and General Motors is taking orders for bi-fuel pickup trucks in the fourth quarter of 2012.
Ford will offer "CNG prep" gasoline engines that can more readily be converted to natural gas after production, and has certified several companies to convert the vehicles after production to operate as either dedicated CNG or bi-fuel natural gas vehicles.
So while thanks to fracking, U.S. natural gas reserves appear plentiful and gas suppliers might like you to believe prices will stay low so you'll at least keep up your demand, there's reason to believe the U.S. and global markets will bring natural gas prices up or oil prices down (which will reduce natural gas supplies) until the prices of a barrel of oil and one mcf of natural gas are closer to energy parity: about six to one.