Gas supply changing energy dynamics

The Greatest Commodity Story Ever Told

You are about to hear the greatest commodity story ever told. Well ok, maybe it isn’t the greatest commodity story ever told and perhaps I am inspired by the season, but it is the greatest commodity story of our generation. It is the story of natural gas and the shale gas revolution. Yesterday natural gas went below $4 mmBtu, the lowest price in the month of December since 2001. That came even after the Energy Information Agency reported a withdrawal from storage of 164 Bcf in a December where the chill has been colder than normal. Perhaps that is because supplies are an astounding 9.9% above the five-year average, a feat that would have been impossible just a few years ago. Oh sure, you may have heard the story that U.S. natural gas production had peaked out. Or how our dwindling supplies and sharply rising prices of gas was one of the biggest threats to the U.S. economy. We were warned from Canada, our largest foreign supplier, that if push came to shove and it was a very cold winter they might have to cut the U.S. off. Countries like Iran and Russia who owned some of the world’s largest proven reserves of gas were talking about forming an OPEC like cartel to press their advantage of the natural gas starved U.S.A. The situation was bleak.

But then something amazing happened! High prices cured high prices. Because natural gas prices soared to all time highs people started to wonder how they could profit or at least solve this problem. Then one amazing entrepreneur decided to look at existing technology and saw supply in a different way and before you knew it that ingenuity created an abundance of supply. They knew that gas was in shale rock but it was hard to get to. Shale rock shattered when drilled in to and the recoverable gas was mostly lost making it uneconomical to produce. Yet the idea that you could horizontally drill and shoot water and chemicals hydraulicly into the rock recovering the majority of that trapped gas and the world was changed forever. And it continues to change.

In fact the natural gas is changing so quickly that yesterday the Energy Information Agency had to issue a press release to update their projections on our energy future. The EIA says because of the growing reliance on natural gas from shale we will reduce energy imports as well as greenhouse gas emissions. First of all the EIA had to increase its estimate of domestic shale gas recoverable unproved shale gas resource at 827 trillion cubic feet which is 474 trillion cubic feet larger than previously reported. The EIA says that this larger resource leads to about double the shale gas production and over 20% higher total lower-48 natural gas producing states. Therefore the EIA estimates that the U.S. import need will decline. The EIA says that projected demand for energy imports is moderated by increased use of domestically produced biofuels, demand reductions resulting from the adoption of efficiency standards, and rising energy prices. Rising fuel prices also spur domestic energy production across all fuels, which moderate growth in energy imports. The net import share of total U.S. energy consumption in 2035 is 18%, compared with 24% in 2009.

What is more because of our entrepreneurial ways the air will be cleaner even without government mandates or the Kyoto protocol. How is that possible? The EIA says that assuming no changes in policy related to greenhouse gases, carbon dioxide emissions grow slowly, but do not again reach 2005 levels until the year 2027. After falling 3% in 2008 and nearly 7% in 2009, largely driven by the economic downturn, energy-related CO2 emissions do not return to 2005 levels (5,980 million metric tons) until 2027. CO2 emissions then rise by an additional 5% from 2027 to 2035, reaching 6,315 million metric tons in 2035.

So if you are worried about our foreign dependence on energy the EIA says that of the natural gas consumed in the United States in 2009, 87% was produced domestically; thus, the supply of natural gas is not as dependent on foreign producers as is the supply of crude oil, and the delivery system is less subject to interruption. (Or by OPEC or Russia) The availability of large quantities of shale gas will further allow the United States to consume a predominantly domestic supply of gas.

If you’re worried about global warming (which I can’t Imagine if you have been in Chicago this week) natural gas is cleaner-burning than coal or oil. The EIA says that the combustion of natural gas emits significantly lower levels of key pollutants, including carbon dioxide (CO2), nitrogen oxides, and sulfur dioxide, than does the combustion of coal or oil. When used in efficient combined-cycle power plants, natural gas combustion can emit less than half as much CO2 as coal combustion, per unit of energy released.

Natural gas produced by shale will revolutionize our economy and our world. And it happened not because the government mandated it but because high prices inspired ingenuity. Sometimes high prices are not a bad thing and actually have a function to move the economy forward. The spike in oil prices was a reaction and a reflection of the greatest economic crisis of modern times. But as we can see from the natural gas story, if we allow the markets to work the benefits may far exceed our wildest expectations. Only those who fully understand the dynamics of free markets should make policy that affect them.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


Comments
comments powered by Disqus
Check out Futures Magazine - Polls on LockerDome on LockerDome