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Page added on March 23, 2012
A Natural Gas Reality Check
While T.Boone talks sense and gets to vent his frustration regularly on air, the sad reality is that although the obstacles for substitution to NatGas are not insurmountable, as Michael Cembalest notes we do not get the sense that an NGV fleet is imminent, even with very high gasoline prices. The best shale gas plays are the ones that involve finding liquids in addtion to (or instead of) dry gas. Given the price for coal, natural gas and crude oil per unit of heat/energy humans would stop using oil and gasoline and use more natural gas instead. But in the real world, in which Michael and you and I live oil and natural gas are not frictionless substitutes. As the EIA shows, oil is primarily used for transportation whereas natural gas is used mostly by industry and to create electricity. As a result, there is no substitution effect pulling up natural gas prices, particularly as more natural gas is being found in shale plays. But for shale investors, there are liquids that can be found in shale plays that are worth a lot more than dry gas: shale oil, and natural gas liquids. Shale oil obviously is valued based on oil prices, and natural gas liquids are valued close to oil prices as well. Whether over time natural gas can displace coal or be exported successfully to ‘correct’ the demand-supply equation is the question that remains but for now it seems a long way off and along with the normal operating risks, there is of course a broader issues of fracking – and what operation safeguards will need to be put in place to allay concerns in the future. The point is that demand possibilities are there but seem far off and while broadly the energy sector has been on a positive ride the last few years, we remember the lost two decades of underperformance during the 80s and 90s but it would seem should we ‘dip’ again in the global economy that integrated oils, drilling/services will underperform from their elevated levels.
The 80s and 90s saw a lost two decades for relative energy stock performance. The 2000s was string but suffered during the Great Recession…and of course the integrated oils and drillers/servicers have massively outperformed the NatGas plays – as NG prices have collapsed.
The theoretical ‘energy’ cost (seen below) suggests all rational humans should substitute from Oil and Gasline to NatGas – but of course in reality the frictions are extreme.
However, there are pockets of advantage within the NatGas space as ‘Wet Gas’ is far better priced than ‘Dry Gas’…
And finally the dominant usage of each of our various energy sources (Oil-Transportation and NatGas-more Industrial and resi heating) is clear and ‘sticky’…
5 Comments on "A Natural Gas Reality Check"
BillT on Fri, 23rd Mar 2012 10:33 am
There is not going to be a massive switch to natural gas. Period. There is going to be a gradual drop in consumption of ALL energy as the world economy transitions from a growth pattern to a contraction pattern over the next decades. As the financial system collapses and then is reborn as something less than we have now, globalization is going to die. That means global shipments of natural resources along with the junk we get from Asia now. Countries with a resource are going to keep them or trade with nearby countries and not half way across the planet.
dsula on Fri, 23rd Mar 2012 11:07 am
>> globalization is going to die
Will be a long time before that happens. Do you know how cheap it is to ship a boat load full of chineese made shoes?
BillT on Fri, 23rd Mar 2012 12:38 pm
Well, I do know that the cost per each 40’container has jumped 25% in the last year or so. If increases continue at the current rate, it will not take 10 years to end shipping anything not really needed (clothes, shoes, toys, and other cheap junk) across oceans. The newspaper I have here has a daily page on shipping news. I see what is happening from the Asian side of the ocean. I eat beef from Brazil, canned veggies from Europe, drink milk from New Zealand, fruit juice from South Africa, pretzels from my home area, Pennsylvania, and salmon from Alaska. but the prices have been creeping up for the last 4 years. Soon they will be too expensive to afford and the shipping will stop.
Windmills on Fri, 23rd Mar 2012 10:55 pm
Dsula, container ships and tankers were already feeling the pain at $150/barrel. They were adjusting their speeds and adding days to their routes in order to save money. As we get into those prices again as a long term trend, companies are going to be rethinking their global supply chains.
SOS on Sat, 24th Mar 2012 8:14 pm
The shift is underway across the country. Check out CLNE stock. Nations largest supplier of LNG dispensing stations.
It was always a tradeoff from labor to shipping now both are going up. globalization is starting to appear to be cyclical, just how much and for what products we will see.