Natural gas is experiencing a perfect storm of new technology, a reluctance to cut production, and a pricing anomaly that together may make it a dominant energy source in the U.S. in the decades ahead. How has this happened?
First, there's the commodity's low price. Natural gas hit a seven-year low on Thursday, falling through the psychologically significant $3-per-million-BTUs threshold, on rising supplies and low demand from industry and power plants. Traders say prices could fall to $2.25 to $2.50 per MMBtus before rebounding with increasing demand -- assuming the U.S. economy continues to recover.
Second, the price of natural gas will likely remain competitive with oil in the longterm, and possibly even cheaper on an energy-delivered-per-dollar basis. The main reason: Large storage capacity in the U.S. -- and energy companies' unwillingness 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 regions of Appalachia, the mid-continent, the Gulf Coast, and the Rocky Mountains.
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 reports.
Third, oil and natural gas compete for different customers and functions, and they orbit in different solar systems. Oil, trading at about $74, is now about 24 times the price of natural gas, about triple its historical average comparative expense over the past decade.
And oil, for many reasons, shows little sign of trending lower. Whether it's 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 found ways to defy gravity and remain at a lofty $60 to $75 a barrel despite high inventories and the worst global recession since the end of World War II. Each week, it seems, another oil sector analyst predicts a collapse for overpriced oil -- and each week, it doesn't happen.
The price disparity creates a new opportunity for natural gas to displace both oil and coal. More vehicles, especially fleets of buses, vans, and trucks, could move toward natural gas engines. A bill to increase tax incentives now working its way through Congress would further encourage those conversions. If the price disparity continues, more homeowners may convert heating systems to natural gas.
Coal is considerably cheaper for generating electricity than natural gas, but new Congressional legislation to penalize carbon emissions will likely decrease that advantage. Even the cleanest coal is dirtier than natural gas, which has a lower impact on climate change.
Still, after price, perhaps the most important selling point for natural gas is location: it's a domestic energy source, a crucial factor in a global economy that's likely to become more competitive in coming decades. The U.S. possesses ample conventional and unconventional natural gas, so nearly all the funds allocated to produce and use the energy source will remain in the domestic economy -- serving as a capital source for investment and creating domestic jobs. Our consumption of foreign oil sends $250 billion to $450 billion to foreign governments and suppliers each year -- an energy habit that has increased the U.S. trade deficit.
How significant is natural gas in the nation's energy policy? Oil and 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 to 30 years."
What's Congress waiting for? The nation should pass legislation that increases tax credits to speed the conversion of vehicle, residential, and commercial energy systems to natural gas. Today, natural gas accounts for about 25 percent of the nation's energy production and 22 percent of its electricity production.
Natural gas is not without environmental concerns: it has a low (but not zero) impact on climate change, and some environmental groups are concerned that hydraulic fracturing will pollute drinking water sources. But the advantages of energy independence, more flexible foreign policy, ample reserves, retained wealth and increased jobs, and a lower carbon footprint tip the scale well in favor of a much bigger role for natural gas.
Introduction to Value Investing
Are you the next Warren Buffett?View Course »