Thursday, July 3, 2014

Natural Gas Ain't Cheap...

One refrain I have been hearing a lot over the last few years is that natural gas is really cheap right now, and this will lead to some sort of economic bonanza. This would be nice, if the premise was true. Now, natural gas is certainly cheaper than it was in the aughts, but how does it compare historically? The EIA publishes all sorts of data on natural gas production and prices, but unfortunately does not have an inflation adjusted series, which is more relevant from a policy perspective. I have gone about constructing one, so that we can compare today's prices with those in the past.

I've chose to use the EIA's wellhead price, which was its longest running series until it was discontinued at the end of 2012. The prices in red are estimated from the city gate price, using a linear extrapolation based on the overlapping city gate and wellhead data from 2010-2012 using the regression formula

WH = (CG-2.9053)/0.7031

As you can see, wellhead natural gas is not unusually cheap. While it did very briefly touch historic lows near the beginning of 2012, it's average price over the last year of around $3.60 per tcf is similar to or higher than the real prices of natural gas in the late seventies and the period from 1985-2000.

But what about before the mid-seventies, you ask? Well, fortunately the EIA has less granular historical data going back to the 1920s! Again, I had to do the inflation adjustment myself, so here is their data in 2014 dollars.

Well I'll be. Natural gas was lot cheaper from the 1920's through the mid 1970's than it is today! Who would have guessed?

So no, natural gas is not cheap right now, nor does the futures market predict it ever will be again. It is highly unlikely we will ever return to the real price levels of the middle of the last century, or even to the somewhat elevated but still tolerable prices of the mid 80s and 90s. Instead, we will be faced with high prices in good years and insane prices in the rest. You'd better be ready for it.