This post was initially published March 4th, 2011 on MXpressions
Crude oil over $100/barrel. Gasoline at the pump averaging over $3.40/gallon. Natural gas over $15/mmbtu and electricity prices at an all time high.
It seems like we are heading back to the nose bleed prices of June 2008, when energy production had trouble keeping up with demand from China and the developing world. The result: record high energy prices, across the board.
But today is different. Turmoil in the Mideast and North Africa is driving prices to their historic highs. At the same time, natural gas and electricity prices are down, close to their 10-year lows.
Why the disconnect between oil and gas (and by gas I mean natural gas, not gasoline which is a refined by-product of oil)?
Oil and its byproducts are first and foremost transportation fuels, helping to run cars, ships, airplanes, locomotives. As the economy recovers and the developing world expands, demand for transport fuels increases and so do prices. Oil is also used to run boilers, for homes and industry.
Natural gas, by contrast, is first and foremost the principal feedstock for electric generation. It is also used for heating as well as for some products like ammonia which is used in the manufacture of fertilizer. If the economy is sizzling, electricity demand is up and natural gas prices can be expected to be strong.
Another important distinction between oil and gas is in the way it is transported. Oil can be shipped, trucked, and piped. Gas is generally piped although it can be shipped, in liquefied form, at enormous cost. As a result, the oil industry is much more global. Oil production can be moved throughout the world, before or after it is refined.
Natural gas, on the other hand, is generally consumed close to where it is produced and shipped by pipeline. For our purposes, it is a North American commodity, produced and consumed here, between the oceans.
Two factors have weighed on natural gas prices and kept them low over the past couple years. These factors, in turn, have also affected electricity prices since much electricity is generated from natural gas, second only to coal as a fuel for power stations. First, the economy has been weak and so demand for gas has been down. Second, over the past few years new supplies of natural gas have become available through a new technology known as hydrofracturing or “fracking.”
It is worth spending some time to understand this new source of supply. If it lasts, it could keep prices down for many years. If it is curtailed in any way, we could see natural gas prices jump back up to where they used to be.
Hydraulic fracturing has been used in recent years to transform natural gas production. Our country has reserves of gas that rival the oil reserves of the Middle East. With “fracking,” as it’s called, these reserves can be released from the shale in which natural gas molecules have been trapped for billions of years.
Fracking has been hugely successful and this has pleased many environmentalists who would rather see natural gas used for electricity generation than coal. After all, burning coal gives off noxious fumes like sulphur dioxide whereas natural gas is considered more “clean-burning.” It still emits carbon dioxide but it does not emit sulphur dioxide.
Here is where things get a little more complicated. I’m sure you have heard the warning: “Beware of the law of unintended consequences.” Natural gas may be clean when it is burned. But there may not be so clean when it is produced.
Most fracking uses high pressure water mixed with chemicals. And this water has to go some place. It turns out that the water used in fracking is coming to the surface with thousands of times the levels of radioactive radium and other elements deemed safe for humans. Yes, thousands.
This water is discharged into rivers or sewage treatment plants. Often those plants are not equipped to screen the radioactive elements. Some say that the volume of water flowing through the rivers is not enough to dilute the concentration of these elements.
Thus far the demand for new energy, as well as the pressure to create new jobs and tax revenues in states like Pennsylvania, has resisted the demand for more stringent environmental regulations. This could change.
Just as we watched the growth in natural gas production put downward pressure on gas prices, we must now watch for a potential curtailment in this production. Unless a new technology is found to extract gas without using so much water, environmental concerns could pose a threat. And any curtailment of production could drive prices higher.
MXenergy’s business is designed to help consumers control their utility bills. Our customers rely on us to take on the risks that they would otherwise face. Fortunately, we do a good job at this because of the constant attention that we pay to energy supply.
But one thing we can guarantee: The future continues to be risky and uncertain. Prices are low because of the weak economy and the emergence of huge new supplies of natural gas. But if the economy strengthens and environmental concerns result in a curtailment of these supplies, today’s low prices could quickly become a distant memory.