Vexed By Natural Gas

United States natural gas production in 2010, with just one month of data still due for delivery, is set to nearly match the all time highs last seen in the early 1970’s. By averaging 1,871,272.5 million cubic feet per month through November of last year, total US NG production is slated to reach 22,455,270 million cubic feet in 2010. You can compare this figure with the all time high levels seen in 1971, 1972, and 1973 in the figure below. We are getting close. | see: Annual US Natural Gas: Marketed Production 1900-2009.

There are a number of intriguing issues to discuss here. They range from the analytical war between NG Supply Optimists and NG Supply Pessimists, to the new, deep lows that natural gas prices are experiencing on a real basis. Indeed, the inflation-adjusted price of NG at $4.00 for a million btu has sent prices back towards the lows of 10 years ago. Moreover, the spread to oil remains very blown out. Consider that a million btu in oil costs $16.37 (average of $95 dollars a barrel, divided by 5.8 million btu). This means that Americans, who enjoy low NG prices in part because the resource is not exportable (yet) from the lower 48, can take their btu from natural gas instead of oil at a 75% discount. Exciting yes? Well, sort of.

The problem is that the United States doesn’t know, just yet, what to do with its natural gas. In addition, the US economy doesn’t have enough growth in its power and manufacturing sectors to demand more natural gas, that would spur a faster transition away from oil. The result is a kind of stasis, in which a consumption-led economy is still trying to operate with oil. Previous energy transitions, on a historical basis, are instructive here. For example, it took Britain decades to transition from Wood to Coal–even though coal was cheaper on a btu basis. Sound familiar?

The same analytical error that I made in 2007–that the price spread to oil would force more rapid natural gas adoption–is made now, routinely, in investment circles. But the problem of energy transition is a problem of the built environment. Europe and Japan are in position to uptake more NG as their transport sectors also run on power. The United States, however, is not. A revolution–not a thoughtful and slow transition–would be required to shift the gargantuan btu the US uses in oil, over to natural gas. I’ll make an easy prediction: exports of LNG volumes from both Sabine Pass in Louisiana, and from Kitimat, British Columbia will be well underway before the United States–either through public policy or the free market–has transitioned any meaningful new demand to natural gas.