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.

 

Fracking boomlet, fracking bust...

Well, that was fun, folks.  Back at the height of the housing bubble, natural gas prices spiked.  This made it economical to adopt an existing oil-industry technique (developed in no small part by the federal government), hydraulic fracking, in the pursuit of natural gas trapped in shale rock.  This set off a gold rush, and like California in the 1850's, a lot of people are losing their shirts and the only people making money are those selling equipment to the suckers.  The rush mentality set off a huge burst of production, which preceded to cause, in combination with the recession, for prices to fall from nearly $11 per thousand cubic feet at their peak in 2008 to under $2 at their bottom last April.

So what is the status of fracking now?  A new report from the PostCarbon Institute lays it out in gory detail. Besides a lot of investors drowing in a mountain of red ink due to the rock-bottom prices, production has flat-lined.  Worse yet, the production rates of fracked wells plummets from the moment they are first tapped, falling by over 60% on average the first year and around 50% per year for the next few years.  Even to maintain flat production, something like $40 billion dollars of new equipment and drilling needs to be purchased every year.  In true Red Queen fashion, the fracking industry has to run faster and faster as its old wells' production falls like a rock, and new replacement wells, which are drilled ever further from the "sweet spots", have even less initial production and faster declines than the wells they are replacing.  It is a race they cannot win.  Even if they can outrun their creditors, they can't outrun physics and geology.  There just isn't that much frackable natural gas out there.  Below is a map of the major shale gas plays.  Note that they span about a quarter of the lower 48.  We've already poked and prodded everywhere, folks.  There are no more big plays to be found, and the biggest ones we have either leveled off or already in decline.

So no, fracking is not the long-term solution to anything.  It is an unsustainable boomlet that buys us at most a dozen years or so.  The same is true for the shale oil boomlet as well - it is a decade's worth of very expensive oil.  Both will peak sometime around 2020 and then we will enter yet another phase of long-term decline in production.  When we burn it and it is gone, and our only remaining choice to go after something that is deeper, thinner, dirtier, and even more expensive.  We need to start immediately on a major effort to plan for and construct the necessary infrastructure for a world where both oil and gas are very expensive, and we should be focusing on protecting our remaining high-quality oil and gas reserves rather than gold-rushing them into oblivion.  Our current path is madness.

Ecuador Avatar, and other interesting reads

A few reads I would like to share...

Meet the Shuar tribe of Ecuador, the closest thing here on Earth to what we all saw in "Avatar".  Of course, here on Earth, we turn a blind eye in order to make a quick buck.

Fleeing persecution, the Lykov family fled to the Siberian wild in 1936, whereupon they were isolated from human contact for the next forty years.

No, the minimum wage does not significantly affect unemployment rates.

Why does oil cost about $100 a barrel?  Because the marginal cost of producing one extra barrel of oil averages just about that amount for the major producers.  Get over it.

American carbon emissions are falling, but despite the claims, fracked natural gas is not the primary reason - the slow economy, followed by increasing use of renewables, have had larger impacts.