Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on February 4, 2014
The moral of the natural gas/winter weather story
If the ancient Greek storyteller Aesop were alive today, he might have written a fable about North American energy markets. Aesop’s sheet of papyrus may have ended with the moral: “If you wait long enough, gas prices will go up.”
Last week, the ticker showed the highest continental natural gas prices in four years, momentarily bobbing above $5.50 (U.S.) per 1,000 cubic feet (Mcf) in the United States and $5 (Canadian) in Canada. We know Aesop could have easily penned another truism, “Cold weather drives higher prices,” but would he have offered the more complex wisdom: “Prices under $3.50 are not sustainable?”
Are we to believe that the days of two or three dollars for a 1,000 cubic feet of the coveted heating fuel are gone?
Since December, the shivering populace on the eastern side of the continental divide have dialled up their thermostats and brought vigour back to winter natural gas consumption. Scenes of snowy roads and frosty mustaches made it look like conditions were exceptionally frigid in the U.S. and Canada. They were (and still are). But averaged over the span of the continent, the numbers tell a different story; the spreadsheets show that what we have been experiencing is nothing more than a good old-fashioned winter. While thermometers have been showing cold in the east, readouts in western states like California have been indicating warm temperatures.
Of all the natural gas burned in North America in one year, between 30 and 35 per cent is seasonally related to warming up our bodies in the winter months. Heating Degree Days (HDDs) are a measure of cold weather intensity that correlate directly to natural gas consumption. Figure 1 shows weekly U.S. HDDs from 2000 to present. The seasonality of heating is obvious: Furnaces are turned off in mid-summer and blowing hard in the third week of January.
What’s notable about our HDD chart this week is that there is nothing notable about this winter of 2013-14. Total HDDs have been close to the long-term average, back to 2000. In fact, this winter’s performance is unremarkably reminiscent of the winter of 2009-10.
It was the winter of 2011-12 that was weird – one of the warmest on record. And last winter, that of 2012-13, was also anomalously short on heating, and therefore gas demand. Back to back, these abnormally weak winters were juxtaposed against excessive gas output from shale drilling. On top of that, large quantities of associated gas – natural gas liberated as a byproduct from oil drilling – also pressurized the pipeline gauges to “full.” Storage levels ballooned out as a consequence. Not enough consumption and too much production combined in a “perfect storm” that pummelled gas for two years hence.
Today, North American natural gas production is still rising, but nowhere near the growth rate experienced between 2007 and 2012. During that boom era, productive capacity in the U.S. expanded by 20 per cent (10 billion cubic feet a day). Today, output growth is running at a reasonable 2 per cent to meet incremental demands, which means that the demand-pull of a normal winter isn’t masked by a surplus of production.
By the numbers, this coming year is like déjà vu 2010, which was arguably a pretty “normal” year. Volumes of natural gas in storage today – where supply meets demand – are on a restrained 2010 trajectory. By association, price indications for 2014 also seem to be tracking 2010. Back then Henry Hub averaged $4.40 (U.S.) Mcf while AECO logged the year at $4.00 (Canadian) Mcf. Those numbers are reasonable expectations for 2014.
Yet neither producer nor consumer should believe that $4.00 (U.S.) Mcf ($3.50 U.S. Mcf AECO) is a stable price, although the bias is for a firmer floor. Volatile weather will always conspire to rattle the markets up and down. Fundamentals are running hot and cold too. New drilling and completion techniques continue to improve productivity, yet the marginal cost of bringing dry gas to market is still obscured by waste gas coming from oil drilling. Production growth is becoming increasingly dependent on “sweet” areas like the Marcellus (concentration of assets is usually accompanied by greater volatility). And the price impact of potential liquefied natural gas exports may excite markets in a couple of years.
More than anything, the past couple of months remind us that natural gas is a commodity that can’t sit still. Prices are, and will continue, to be volatile. So it’s prudent for both producers and consumers to heed Aesop’s advice in his classic winter fable, The Grasshopper and the Ant: “It is wise to plan for tomorrow today.”
Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.
11 Comments on "The moral of the natural gas/winter weather story"
Davy, Hermann, MO on Tue, 4th Feb 2014 12:19 pm
How about when we ever have some hurricanes again to rattle cages! A hurricane in the financial market will do the same when the numerous “red queen” drillers need financial market liquidity to facilitate the leverage these firms employ to get the gas out. All the substitution with gas for coal/nuke power, all the transport going gas, and talks of gas exports and there is another hurricane. Looks to be an active hurricane season in the next few years. This gas business is dangerous. We are mothballing coal and nuke plants with the same old song and dance of plenty. I don’t like coal and nuke like many here but the huge capital investment has been made. Prices are heading north or we will have lower prices and gas shortages. We are in trouble if we let the market manage a excessive coal and nuke conversion to gas based upon unlikely gas supply. We may wake up one day with an unstable grid which will destabilize the net and so on.
Makati1 on Tue, 4th Feb 2014 1:16 pm
I see $8+ NG next winter and maybe $12+ NG the next one. ‘Excess’ was only a temporary byproduct of the fraking insanity, not meant to last.
Japan was paying about $15 the last time I read about prices there.
Northwest Resident on Tue, 4th Feb 2014 3:23 pm
“We may wake up one day with an unstable grid .”
Davy, I think that is pretty much a given. Not if, but when. And not due only to unreliable fossil fuel input, but also to lack of reinvestment in maintenance and replacement of aging equipment. The grids were mostly all built during a time when oil was very cheap, economic growth was booming and BAU was rocking steady. Now, all over the world, grids are decaying, components are popping, but there is not enough money to replace those grids. We are in a world of hurt — we just haven’t felt it yet.
Davy, Hermann, MO on Tue, 4th Feb 2014 4:02 pm
Northwest Resident on Tue, 4th Feb 2014 3:23 pm
i agree fully
Makati1 on Tue, 4th Feb 2014 1:16 pm
I doubt the US can afford $12. Probably start a war!
DC on Tue, 4th Feb 2014 6:32 pm
Dont forget, one of the main rationales, not the only one, but up there, the ‘fraking craze’ was intended to push the price of NG as low as possible in order to make wind and solar less attractive. Since the uS never needed the frak to begin with due to demand destruction, fraking never had a much of a logical basis to start with. It certainly couldnt be justified either on the basis of ‘need’ or economics.
Lets hope Mak is right. If Ng starts to move back towards its ‘proper’ $10-$15 price, then things like wind and solar AND passive measures like, say, stuffing newspapers in the walls of our suburban shacks matchstick and sawdust walls, will become cost competitive again. Passive measures and clean power will start to look ‘good’ again. We see time and again, the only thing that ultimately motivates people at least slovenly North Americans is cost. We cant and wont do anything about our amazingly shoddy construction practices, but high gas prices might prod some of us to at least plug some of the worst holes in our sawdust shacks.
Northwest Resident on Tue, 4th Feb 2014 7:09 pm
DC — While a lot of North Americans are “slovenly”, that also holds true for a good percent of people all over the world. Me personally, I’m in my 50’s and can still run a few miles, dig a lot of holes, carry a lot of lumber and push a wheelbarrow with a full load of topsoil — doing it all the time — definitely not slovenly. It just continues to annoy me how you consistently toss all Americans into that big pile as if we’re all equally guilty and all just one consistent uniform mass of hate-worthiness. You have a lot of good things to say — but mixing it with off-topic insults just detracts from what you’re saying — and annoys me.
I doubt that the initial intent of the “fraking craze” was to discourage investment and/or usage of wind and solar. Where did you hear or read that? More likely, the “original intent of the fracking craze”, this time around, is to fatten the list of future oil sources and to keep the oil industry workers employed — to keep the illusion of BAU alive.
CAM on Tue, 4th Feb 2014 7:17 pm
Of course average temperature or degree days is not necessarily a good indicator of heating requirements. For example I find when the outside temperature is 60F no heating is required. So, in the first scenario lets, for arguments sake, say that the temperature across the country everywhere is 60F. This makes the average temperature 60F and no heating is required anywhere. Now lets say that the outside temperature for half of all heating requirement, probably the south, is 85F, and the temperature for the other half is 35F. The average temperature for the country is still 60F, but obviously a lot of heating is going to be required in the North.
Davy, Hermann, MO on Tue, 4th Feb 2014 7:59 pm
DC on Tue, 4th Feb 2014 6:32 pm
stuffing newspapers in the walls of our suburban shacks matchstick and sawdust walls, will become cost competitive again.
Our huge buildup of subpar housing stock and how true are DC’s words.
DC, high gas prices won’t necessarily make renewables economical. Renewables are very much a function of the economy and influenced by fossil fuel prices. Renewables will not be produced or purchased in a failing economy. Much of renewables EROI are fossil fuel costs. We are all aware of what high fossil fuel prices do to the global economy. The problems with renewables today is it takes multiple years to see a return on an investment needed immediately. This means renewables are much more economically elastic then traditional fossil fuels. We are in an energy trap with no plan B. If we would have taken all the money blown on the financialization of the global economy and its resulting misallocation of resources into a millions of unneeded consumer products we may have been able to make a transition but no longer. It still would not matter because even if we made a transition rationally overpopulation and climate change are sure to finish us off.
GregT on Tue, 4th Feb 2014 8:23 pm
In DC’s defence, he did say NORTH Americans, of which I am one, and I must agree. There is no shortage of slovenliness in Canada either.
On the indoor climate-control issue, I routinely see thermostats set at 74 degrees during the winter, and 68 during the summer. I mean, can’t we even settle on one temperature year round anymore?Why not 68 during the winter, and 74 during the summer?
Northwest Resident on Tue, 4th Feb 2014 8:50 pm
GregT — Instances of energy wastage abound, everywhere. The five-story hundred-or-so office building I used to work out kept the lights on in all offices until the janitors were finished cleaning for the night, then the last thing the janitor did on the way is turn all the lights off. I asked a janitor “why” one time, and the answer was most unintelligible but had something to do with safety concerns. Another: The one high school in the 20K population town where I live leaves the “street lights” and many other lights on all night long, every night. Why? To hopefully scare away any would-be vandalists, of which there are no doubt quite a few, and the lights being on do tend to work. Multiply that times umpteen hundred thousand schools across North America and the result is we are burning boatloads of fossil fuel energy to protect against a few cases of prankster vandalism. And that is still less than a drop in the bucket when it comes to energy wastage. I’m afraid it will take a very stern and harsh “lesson” to teach humans not to waste so much energy.
DC on Tue, 4th Feb 2014 11:30 pm
You know, I did specify that *one* of the underlying rationales for flooding the ‘market’ with basically unneeded gas, was to make renewables look less appealing, economically. On the larger issue of whether or not wind or solar will ‘save’ the wall-mart economy, I am basically in agreement with most of you everyone here on that point. Whether one disagrees with me or not, us NORTH Americans base pretty much all important decisions on short term economic gain\loss. If barely supported ‘renewables look too costly vs subsidized natural gas, then people will stick with what they have. The uS oil cartels cannot manipulate the price of electricity in any real way, nor can they do much about what little actual oil we have left. It is hardly a secret oil ‘producers’ have flooded energy markets and drive down the price of fuels whenever the ugly spectre of decentralized renewables raise their ugly head.
Again, the frakers have more than one motivation for doing what they do, hindering the spread of renewables is definitely one of them. And just because they don’t send a press release to that effect doesn’t mean it isn’t occurring.
All fossil-fuel decline mitigation strategies are expensive. Passive or active. N.America is doubling down on a cheap fossil-fuel forever strategy and frakgas has definitely played a part in that narrative. False and misguided as it may be.