Go figure the energy markets. Oil, which despite the U.S.'s worst recession in more than a generation, never really approached its 150-year real average of $25-30, is trading around $72 per barrel. Meanwhile, a prime competitor, natural gas, hit a 7-year low Thursday, falling through the psychologically-significant $3 per million BTUs (MMBtu) level on rising supplies and low demand from industry and power plants.
Given the two prices, oil is now about 24 times the price of natural gas, compared to an historical average of about 8.4 times natural gas over the past decade.
Now, while the two energy sources do not have identical customers or uses, the law of supply and demand suggests that over time the price gap between the two has to shrink, stemming from more use of natural gas, less use of oil, or both.
Recession hits nat gas hard
What's really hurt natural gas prices? The recession (which reduced commercial and residential demand), large storage capacity, and the to-date unwillingness of natural gas producers to stop producing the stuff. Seasonally, a cooler-than-normal summer this year across much of the nation (natural gas is one fuel used to generate electricity), has further hurt prices.
During the frenzy of the leveraging boom in 2008, natural gas prices soared to $13.69 per million btus; it traded at $2.935 per million btus Thursday. Traders say prices could fall to $2.25-2.50 per million btus before demand picks up, assuming the U.S. economy's recovery continues to progress.
Oil, meanwhile, for a variety of reasons, shows little sign of trending lower. Whether it's oil-as-an-asset-play, or the threat of inflation, or a weakening dollar, or 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 $70 price, despite the worst global recession since the end of World War II.
Given the above oil/natural gas dynamic, investors and certainly U.S. motorists, may ask why isn't natural gas used more and oil used less, given the former's comparative cheapness? And why don't we see more natural gas cars, trucks, and buses on the road?
The answer is complex. Concerning autos, gasoline, for all of oil's negatives, has been a remarkably convenient fuel form to use -- convenient just so long as one ignores three oil shocks, periodic gasoline spikes to the stratosphere, a massive transfer of wealth out of the U.S., and the current frustration: $2.60 per gallon gasoline amid a recession and low consumption. Converting even part of the U.S. vehicle fleet to natural gas would be a costly and time-consuming undertaking, one that would require a massive infrastructure investment: and to do it the nation would have to be assured that natural gas' price advantage will last.
But the United States does have plenty reserves of both conventional and unconventional natural gas, and that suggests that, so long as the outlook for comparatively low natural gas prices exists, some energy system conversions will occur in the U.S.
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Reader Comments (Page 1 of 1)
8-20-2009 @ 7:48PM
william lindblad said...
Some good thoughts here, and yes, it is a bit screwy. Oil is rising, gasoline is down and so is natural gas. Inventories all around are high? There are those that are betting that oil 2will be around the 100 mark by year's end, however I am not one of them. I do expect that energy prices will remain up there, up there in respect to what they were two years ago. It almost seems like some kind of silly game in which there are spikes and drawbacks that are extreme, only to find a middle ground that is quite a bit higher than the start.
The public tends to become annoyed at the extreme high and placated at the low. Thereafter, price rise a bit and remain stable. Is everybody happy? This is like the old saying attributed to Lincoln. I may not have it correct but it went something like - you can fool all the people sometime and some of the people all of the time - but you cannot fool all of the people all of the time. The last part does make me wonder. Besides, Abe never said it. It's the work of a Illinois reporter and Abe just went along for the ride by never denying it.
On the part of conversion to natural gas. Yup, would be costly, both in vehicle production and service station ends. Nice idea, but it has a lot of drawbacks, both in fueling and mpg that the vehicle could carry. If yo wish to see an example go fill your bar-b-que propane tank instead of doing an exchange. It's similar enough to let one know that filling your car will not be the same as putting a nozzle in a hole. Considering that filling these tanks (propane) has undergone extensive changes (federal mandates) in the last ten years (all of which cost the consumer money in tank obsolescence) that the idea of using this fuel for vehicles has a long way to go. This is one that you either get it right the first time - or don't even think about it. Imagine telling people that their vehicle has to be retrofitted or you can't use it?
Do this the simple way - all fuels will cost more by the end of the year.