The weekly reports on natural gas storage came out today, and they show industrial production’s nosedive having a huge effect. Natural gas storage shot up compared to the historical average from only 1.2% above average last week to 8.4% higher! Warmer-than-usual weather combined with industries’ woes to make the storage withdrawal more than 80% below average.
With winter ending in a few short weeks, I’m starting to wonder whether prices of natural gas could fall another 20+% toward $3 per MMBtu or even lower. This would make natural gas-fired electricity a viable substitute for coal-fired electricity. For historical reference, natural gas prices averaged below $3 per MMBtu throughout the 1990s and one year in the 2000s (2002).
The evolution of natural gas’s price is an interesting story. Depleting natural gas fields have made US output roughly stagnant since 1970. Increased consumption was provided for by increasing imports, mostly by pipeline from Canada. But then their production began to stagnate ~2000 as depletion took hold in their fields. The only way to increase or even maintain production to satisfy demand was through raising prices to make difficult fields (like unconventional shale) more profitable and to import from other global producers through an expensive process of liquification at an extremely cold temperature. The capability to ship this Liquid Natural Gas (LNG) which emerged in the 1990s has created a more global market for the fuel rather than the stranded regional markets of old made up of pipeline grids (which still account for more than 80% of natural gas flow due to their lower cost).
Price increases from ~$2 to above $6 brought on enough new domestic production in the US to lower import needs in 2008. But now that prices slid to ~$4, the number of gas rigs exploring and producing is falling quickly. We will probably see a fall in US production if prices do not rise. But that’s not a big deal in the short-term because demand is so low. Whether it will be an issue next winter or the winter of 2010-11 depends on how much economic recovery takes place, how cold it gets, and how quickly and deep gas production falls.
Hopefully, the lower energy costs will help our economy gain some footing — and we will work hard to keep such costs low by continuing to deploy efficiency and renewables to begin replacing fossil fuels.
Onwards-
Tags: Canada, energy prices, Natural Gas, recession, US