Natural gas' U.S. prospects rise as its price falls

By Money Matters Editors

A ‘perfect storm’ of new technology, producers’ reluctance to cut production, and a pricing anomaly has created a new opportunity for natural gas to emerge as a dominant energy source in the United States in the decades ahead. Here’s the low-down:

First, there’s natural gas’ low price. Natural gas hit a 7-year low earlier this year, falling through the psychologically-significant $3 per million BTUs (MMBtu) level on rising supplies and low demand from industry and power plants. Traders say prices could fall to $2.25-2.50 per million Btus before demand picks up, assuming the U.S. economy’s recovery track continues to progress. Natural gas is currently trading at about $3.65 per MMBtu.

Second, long-term, natural gas will likely at least remain competitive with oil, and probably remain cheaper on an energy delivered per dollar basis. The main reason? Large storage capacity in the United States, and the to-date unwillingness of natural gas producers to stop producing the stuff. New technology, including a process called hydraulic fracturing, enables the tapping of natural gas sources in the previously cost- prohibitive U.S. regions of Appalachia, the Mid-Continent, the Gulf Coast, and in the Rocky Mountains.



What’s more, estimated U.S. natural gas reserves have increased 35 percent, mostly on the ability to access those new sources, with estimated reserves totaling 2,074 trillion cubic feet in 2008, up from 1,532 trillion cubic feet in 2006, according to the Potential Gas Committee, The New York Times reported.

Third,  the oil and natural gas, which compete with each other but which do not have identical customers or uses, are currently orbiting in different solar systems. Oil, currently trading about $71, oil is now about 20 times the price of natural gas, compared to a historical average of about 8.4 times natural gas over the past decade.

In addition, oil, meanwhile, for a variety of reasons, shows little sign of trending lower. Whether its oil-as-an-asset-play, the threat of inflation, a weakening dollar, OPEC production cuts, or the prospect of rising demand in emerging markets, oil has (so far) found a way to defy gravity and remain at a lofty $60-75 price, despite high inventories and the worst global recession since the end of World War II. Each week, another oil sector analysts says oil is overpriced and predicts a price collapse; but it doesn’t happen.

A new opportunity for natural gas?

The price disparity creates a new opportunity for natural gas to displace both oil and coal. Concerning transportation, more vehicles, especially fleets of buses, vans, and trucks could move toward natural gas-powered engines: a bill to increase tax incentives currently working its way through Congress would further encourage those conversions. Also, more homeowners are likely to convert heating systems to natural gas, if the price disparity continues.

Concerning electric power generation, coal is still considerably cheaper than natural gas for generating electricity, but new Congressional legislation to penalize carbon emissions will likely decrease that advantage: even in its cleanest form, coal is dirtier than natural gas, and natural gas has a lower impact on climate change.

Still, after price, perhaps natural gas’ most important selling point is its location: it’s a domestic energy source.  The importance of that factor can not be underscored enough in a global economy that’s likely to experience competition for resources in the decades ahead, including key commodities. Unlike oil, the United State possesses ample amounts of conventional and unconventional natural gas. That means nearly 100 percent of the money needed to produce and use the energy source remains in the domestic U.S. economy – serving as a capital source for investment, and creating domestic jobs. Conversely, consumption of foreign oil results in the annual transfer of $250-$450 billion in U.S. wealth to foreign governments and suppliers - an energy habit that has also increased the U.S. trade deficit.

How significant is natural gas in the nation’s energy policy? Oil/energy analyst Daniel Yergin, co-founder of Cambridge Energy Research Associates, has called unconventional natural gas the biggest innovation in the energy business in the past 25-30 years.

It’s time for Congress to act: the nation should pass legislation that increases tax credits to speed the conversion of vehicle, residential, and commercial energy systems to natural gas. Currently, natural gas accounts for about 25 percent of the nation’s energy production, and 22 percent of electricity production. Natural gas is not without environmental concerns: it has a lower impact on climate change, not no impact, and some environmental groups are concerned that hydraulic fracturing will pollute drinking water sources.

Still, the advantages of natural gas - energy independence, enhanced foreign policy flexibility, ample reserves, wealth retained in the United States, more domestic jobs, a lower impact on climate change - tip the scale well in favor of a much bigger role for natural gas for the nation’s energy needs.