Natural Gas Could Be The Next Big Thing

Shawkah Hammoudeh, Ph.D., professor of economics, recently penned an op-ed about the rising usage and price of natural gas due to increased demand and decreases in supply.

The cold weather arrived early this fall in the Northeast and Midwest of the United States, which are the major natural gas consumers in this country. The arctic air marched through those regions, waking up the prices of the dormant natural gas, which have lagged oil prices for years. The price of 1 million British thermal units in Europe of this fuel is $12/MMBTU. This is three times the counter price in the United States. Meanwhile the price in Japan is $17/MMBTU, which is more than four times the price in the United States. But, the recent cold storm has increased the U.S. price to about $4.50/MMBTU, rising by 27 percent so far this year. It is the best performing commodity among the 22 commodities in the Dow Jones-UBS Commodity Index for the current fall, which is one of the coldest in more than a decade.

The cheapness and dormancy of natural gas prices has to do with the shale natural gas revolution that came after combining the vertical and horizontal drilling techniques to crack the shale formation. The revolution is a game changer that increased both the supply and reserves of this fuel in the United States and decreased its prices significantly at the household and firm levels.

It seems that the fall chill this year has awakened the natural gas price. It is expected to move up steadily but without spikes for many years to come. Its inventory has fallen this year to its lowest level since 2008. The projected colder temperatures for 2014 compared to the record-warm temperatures in 2012 should also bring higher natural gas prices than in that year. The steady upward movement in the price is also expected to continue in the next few years.

Additionally, the increase in demand (incremental demand) will continue to exceed the increase in supply in the next five years. This differential predicts steady increases but without jumps in natural gas prices. The wild card here is the speed of conversion of transportation fuels from crude oil to natural gas. Gas-to-liquids and compressed natural gas are predicted to absorb about three billion cubic feet per day of the increase in demand. There are companies that are now building the U.S. natural gas highway to be used particularly for transit buses and trucks.

In addition to the domestic demand driver coming from changes in domestic fundamentals, such as expected rising economic growth, a much stronger driver is expected to come from already-approved natural gas export terminals such as Cheniere Energy’s. The export demand may reach 5.5 Bcf/d in the coming five years. By 2020, the United States could export as much as 61.7 million tons per year of liquefied natural gas. That would make the United States the second-largest LNG exporter in the world, next to Qatar. Other deals in the licensing program are likely to push the total closer to 80 million tons per year, which would exceed Qatar’s current total of 77 million tons. This driver should be another push to natural gas prices over those years. China may play a similar role in driving up natural gas prices in the coming years as it has done with the crude oil prices over the last decade or so. China is building its power generation infrastructure and its power demand is expected to increase by ten times by 2035. Since natural gas is currently about 2 percent in the power fuel mix and there is a strong popular discontent with pollution, there should be a strong import demand for U.S. liquefied natural gas coming from China in the future.

The shale natural gas revolution is also real and a game changer for the U.S.’s energy costs. It has been felt in generating electricity at power plants and in warming American homes. It has also enhanced energy security as imports dropped and reserves increased significantly. Natural gas imports have been going down steadily. They should lead to improvements in the current account of the balance of payments.

In conclusion, people have been happy with the current $100 oil price. They should also be happy with natural gas prices ranging between $5-$6/MMBTU for the next few years.