From the February 2014 issue of Futures Magazine • Subscribe!

The natural gas economy is a long-term play

The story of the natural gas market is as old as time itself. It is a story of the grand commodity cycle. A commodity goes from oversupply and cheap prices to rising demand and ultimately tighter supply and high prices. Then those high prices inspire new production, causing a glut of supply. 

Of course, the glut usually brings in new demand and economic growth trying to take advantage of that demand, and the story begins once again. The backdrop of that story is huge economic growth and opportunity for those who recognize the pattern.

 In fact, this type of situation could be called an era. The era of the natural gas economy has just begun. It also means that low prices will inspire new uses and ultimately higher prices in the long run.   

 It was not too long ago, 2003, when former Federal Reserve Board Chairman Alan Greenspan warned that our declining production of natural gas was putting the economy at risk.  He said, “We’re going to see some erosion in a number of macroeconomic variables” if gas prices stay high. He said that one of the biggest threats to our economy was our inability to produce enough natural gas and warned that we would lose jobs and manufacturing, and we would not be able to compete in the global economy. We had to build terminals to import natural gas or it would spell economic doom.

Of course there is an old saying, ‘high prices cure high prices.’ They built a better mousetrap thanks in part to the genius of George Mitchell, and the fracking revolution began. Instead of economic doom, an abundance of supply meant a coming economic boom. Instead of peak gas, we now have supply that could last hundreds of year. Yet that does not mean prices always will be cheap. 

Natural gas prices started to tumble as producers not only exceeded old production levels but produced natural gas at record levels. Instead of a shortage, we had a glut and supplies that should last 100 years or more. In fact, we saw prices fall from an all-time high of $15.78 per mmBtu in 2005 to a low of $1.90 in 2012. 

Of course, with many gluts, there is a sense that prices will stay low forever. In 1998 when crude oil prices fell toward $10 per barrel people thought they could go to $5. Yet low prices spur demand and in some cases much faster than people think. Like China that built an economic explosion on cheap oil, the United States is building an economic powerhouse on cheap natural gas.

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