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By Paolo von Schirach
January 24, 2012
WASHINGTON – When it come to US energy prices, could there ever be such a thing as “too low”? Well, apparently yes. In the wake of the enthusiastic natural gas drilling that followed the hydraulic fracturing (“fracking”) revolution that allowed extraction from vast shale formations in the last few years, there is now a huge gas glut in America. This is a real problem for the large US energy companies, such as Chesapeake Energy, that have invested in gas development, to the extent that gas prices have fallen below extraction costs. And prices have fallen dramatically. In 2008 US natural gas was priced at $ 14 per million BTU. Now it is down to $ 2.5 per million BTU.
Gas prices way down
This is a staggering fall. Of course, from the stand point of all consumers, lower prices is great news. But from the stand point of the energy companies it is a real problem, because at least some of them lose money on their operations, even though not all of them, and not evenly. Indeed, production costs vary and they include the cost of the leases to the land owners. And these are hardly uniform, as they were entered into at different times, in different market conditions. Besides, in many instances, gas is extracted as a byproduct of highly profitable oil whose price is still at around $ 100 per barrel. Energy companies that get the gas along with oil can afford to essentially give the gas away for free, because they make enough money with crude.
The economic benefits of low gas prices
That said, assuming that just announced production cuts will stabilize prices at a higher level and thus producers’ profitability, historically low natural gas prices represent an incredible and long lasting economic benefit for anemic America. Gas is used for electrical power generation and for heating homes and buildings. Low prices mean lower electrical bills and lower heating costs. Besides, gas is used as feed stock by the plastics and chemical industries. Dramatically lower prices translate into lower operating costs and increased international competitiveness for US producers.
Use additional supply to power heavy trucks
But here is an idea for American industry and policy makers that would allow the absorption of all this additional supply, with huge benefits for all, producers and consumers: adopt the “Pickens Plan“. Use part of this super abundant and super cheap natural gas to power US truck fleets. Of course this is not so easy. We are talking about getting expensive new trucks, while creating from scratch a huge and costly new national infrastructure of refueling stations. More easily said than done.
Natural gas much cheaper than diesel
And yet the numbers look extremely attractive. Trucks run on diesel fuel made from oil. While US oil production is mercifully also going up, there is still a world price for oil. So domestic diesel prices will stay high. Therefore it makes sense to invest in new trucks running on natural gas, since there is almost a guarantee of lower fuel prices for decades to come, given all this gas supply estimated to last for at least 100 years. If this transformation from diesel to gas happened, the US gas industry would have a new and very large customer: truck owners. And a steady demand from US truck fleets operators should help create a more predictable market and thus help create a better balance between supply and demand and eventually more stable prices.
US Government should help the transition
The US Government should help by making it easier for truck owners to make the leap and buy expensive new trucks, via tax credits or other incentives. And the US Government could also take the lead by announcing a steady program to buy new natural gas powered trucks. All this would be extremely beneficial.
Think of it. The US natural gas industry would have large new, permanent customers. Lower fuel prices for US trucks would lower the cost of transported goods, and this would act as an anti inflationary balm for the entire economy. On top of that, the US would be able to import much less oil, as the demand for diesel fuel would be curtailed significantly. The end result would be a lower national oil bill and increased energy security, since a huge chunk of US demand for transportation fuel would be satisfied by domestic natural gas supply.
Truck fleets operators would be steady customers for US gas
Look, this huge transformation will take a while. And, in truth, even if such a major energy/industry/transportation policy shift were decided upon today, none of this would affect current gas prices due the supply glut.
But markets always love to know the road ahead. If you are a US natural gas producer, it would be comforting to know that your market is going to get bigger and that there will be more steady customers for your product.
A better sense of actual market size and upside potential would help plan more efficiently gas exploration and production. If we played this right, in the end America may not have “too much natural gas”. It will have enough to supply today’s and tomorrow’s new customers, with enormous economic benefits for the entire Nation.