Saturday, November 19, 2011

Charts of the Day: Oil vs. Natural Gas Prices; On An Energy-Equivalent Basis Gas is 79% Cheaper vs. Oil


I featured a post yesterday about oil prices vs. natural gas prices with charts from Scott Grannis and Nathan Slaughter, and have two new charts to present above inspired by some charts in the NY Times last February (thanks to Ed Dolan for the link). 

The top chart compares oil prices ($ per barrels) to natural gas prices back to 1994 for the energy equivalent of one barrel of oil, with natural gas prices converted at the ratio of 5.8 million BTUs per barrel of oil.  The bottom chart shows the percentage price difference between oil and natural gas, on an energy equivalent basis, from January 1994 to November 2011. 

The bottom chart shows that over the last 18 years, natural gas has been cheaper than oil on an energy-equivalent basis most of the time except for fairly short periods in 1996 (1 month), 2001 (5 months), 2003-2004 (7 months), and 2005 (4 months).  For the last 33 months starting in March 2009, natural gas has been more than 50% cheaper than oil, and in November gas was cheaper by a record 79% ($95 per barrel for oil vs. $19.82 for gas).  

Bottom Line: Thanks to the shale gas revolution, there's never been a time in recent history when natural gas has been cheaper when compared to oil on an energy-equivalent basis.   

19 Comments:

At 11/19/2011 5:49 PM, Blogger Larry Sundram said...

if so why is the retail price per gallon of propane almost equal to the price of refined gasoline? Is this a local phenomena in my area? local monopolies in distribution?

 
At 11/19/2011 6:37 PM, Blogger JPINTX said...

Propane comes from two main sources; seperated from the natural gas stream as the gas is "dried" prior to transporting it for distribution to natgas end users, and secondly propane is separated from crude oil in the oil refining process. Either way, producing the propane has a cost, and storing and transporting propane requires expensive pressure vessels, an additional expense.

 
At 11/19/2011 8:15 PM, Blogger Benjamin said...

Natural gas is not only being found in shale, but many other places globally. Cars and trucks can easily run on compressed natural gas, or propane (also called LPG).

Natural gas can even be converted in gasoline, known as gas-to-liquids, or GTL.

There may be a ceiling on oil prices.

 
At 11/19/2011 8:36 PM, Blogger abir mandal said...

Larry: You also don't buy fuel on an energy equivalent basis but on a per litre or gallon basis.

 
At 11/20/2011 9:12 AM, Blogger PeakTrader said...

"Bottom Line: Thanks to the shale gas revolution, there's never been a time in recent history when natural gas has been cheaper when compared to oil on an energy-equivalent basis."

We can also thank Peak Oil.

 
At 11/20/2011 9:50 AM, Blogger Hydra said...

You buy fuel on a volumetric basis, but the energy content is reflected in the price. Hence diesel is more expensive than gas. Demand for different fractions also increase prices, as more of the crude oil energy is used to crack heavier fractions into lighter ones. Propane has higher carbon content than natural gas, so it is easier to liquify, and has a higher energy content.

Natural gas can only be liquified cryogenically. Its low energy density as a compressed gas means that vehicles must be refueld more often.

A ruptured Congress tank can explode, but a ruptured propane tank often just Burns.

 
At 11/20/2011 9:52 AM, Blogger Hydra said...

Supposed to read cng tank not Congress tank.

 
At 11/20/2011 10:41 AM, Blogger PeakTrader said...

Some interesting excerpts from 1957?:

"Energy resources and our future" - remarks by Admiral Hyman Rickover delivered in 1957:

Coal, oil, and natural gas supply 93% of the world's energy; water power accounts for only 1%; and the labor of men and domestic animals the remaining 6%.

This is a startling reversal of corresponding figures for 1850 - only a century ago. Then fossil fuels supplied 5% of the world's energy, and men and animals 94%.

Man's muscle power is rated at 35 watts continuously, or one-twentieth horsepower. Machines therefore furnish every American industrial worker with energy equivalent to that of 244 men, while at least 2,000 men push his automobile along the road, and his family is supplied with 33 faithful household helpers. Each locomotive engineer controls energy equivalent to that of 100,000 men; each jet pilot of 700,000 men.

A reduction of per capita energy consumption has always in the past led to a decline in civilization and a reversion to a more primitive way of life. For example, exhaustion of wood fuel is believed to have been the primary reason for the fall of the Mayan Civilization...and of the decline of once flourishing civilizations in Asia.

India and China once had large forests, as did much of the Middle East. Deforestation not only lessened the energy base but had a further disastrous effect: lacking plant cover, soil washed away, and with soil erosion the nutritional base was reduced as well.

Another cause of declining civilization comes with pressure of population on available land. A point is reached where the land can no longer support both the people and their domestic animals.

It is a sobering thought that the impoverished people of Asia...were once far more civilized and lived much better than the people of the West.

Asia failed to keep technological pace with the needs of her growing populations and sank into such poverty that in many places man has become again the primary source of energy.

 
At 11/20/2011 11:23 AM, Blogger VangelV said...

Bottom Line: Thanks to the shale gas revolution, there's never been a time in recent history when natural gas has been cheaper when compared to oil on an energy-equivalent basis.

OK Mark, let's play by looking at a few questions.

1. At what price does the shale gas industry become profitable?

2. How long will production continue at a loss?

3. If cash flows are negative why would anyone lend money to shale gas producers to keep drilling?

You have been hyping the shale gas issue for a long time without ever dealing with the fact that most of the shale gas producers can't make money at less than $7.50 gas. You keep assuming that the losses can continue indefinitely.

 
At 11/20/2011 2:48 PM, Blogger Benjamin said...

Hydra--You are deeply misinformed. Look as gas-to-liquids anyplace. Cricky, the Germans did it during WWII.

 
At 11/20/2011 3:10 PM, Blogger Buddy R Pacifico said...

VangelV writes:

"You have been hyping the shale gas issue for a long time without ever dealing with the fact that most of the shale gas producers can't make money at less than $7.50 gas. You keep assuming that the losses can continue indefinitely."

This is what Range Resources wrote about Marcellus Natural Liquids in their 2010 annual report:

" At $4.00 per mcf and $85 per barrel of oil commodity prices held flat forever, the rate of return for a Marcellus well in the wet gas area of the Marcellus is estimated to be greater than
70%."


Range Resources is the biggest producer in the Marcellus, and just went all-in with the sale of their Barnett Shale holdings in Texas.

I calculate Range's costs at $3.14, BUT this does not include depletion, NOR am I an expert in this field. The company states that depletion is declining in their fields, due to better drilling techniques and the kind of liquids produced.

 
At 11/20/2011 3:51 PM, Blogger NormanB said...

The investment question is how this wil resolve itself? Any ideas?

 
At 11/20/2011 4:01 PM, Blogger al fin said...

Natural gas can be converted to diesel via steam or dry reforming + Fischer Tropsch, or it can be converted to gasoline via the Exxon Mobil "methanol to gasoline" MTG route.

Shell's Qatar GTL plant (Fischer Tropsch) expects to reap profits of $6 billion per year.

South Africa's SASOL operates both coal to liquids and gas to liquids Fischer Tropsch plants.

Oxford Catalysts sells a "shoebox" Fischer Tropsch device that fits on a table top and produces roughly 6 to 8 barrels of diesel per day from either offshore or stranded natural gas.

GasTechno has a "miniGTL" plant that uses the methanol to gasoline MTG approach.

Carbon Sciences is stepping in with a dry reforming of methane process plus F-T to diesel.

And so it goes. More and more competitors trying to take advantage of the spread all the time.

 
At 11/20/2011 5:49 PM, Blogger Hydra said...

Hydra--You are deeply misinformed. Look as gas-to-liquids anyplace. Cricky, the Germans did it during WWII.


------------------------

I did not say anything about gas to liquids. Certainly you can combine natural gas molecules many ways, to make everything from fertilizer to plastics to diesel.

But the usual situation has been, as i described, to crack crude oil into various products. The more light products you want, like hexane, benzene, gasoline, etc. the more energy and product you sacrifice from the heavy end: bunker C, and asphalt.

How you decide to crack depends onthe relative price and demand for the products: producing more heating oil means less gasoline is available. Producing more gasoline means less asphalt is available.

The situation you describe, is fairly new, despite its old history, as the industry ramps up to the new reality of cheap gas.

Basically F-T reactions involve "unburning" Hydrogen and CO to create hydrogen and hydrocarbons and water. You have to put energy in to create the fuel, so not all the gas is converted to fuel, and it is inherently expensive. Since CO is a product of combustion, converting it back into combustible material is a highly endothermic or energy using reaction.

It may well turn out that alteernative energy sources such as wind or solar may be used to produce that energy, and the resulting hydrocarbons will be partiallly a way of storing the power form intemittent enert=gy sources.

Germany did it because other sources of fuel were unavailable to them and this was a desperate second choice.

 
At 11/20/2011 5:52 PM, Blogger Hydra said...

The investment question is how this will resolve itself? Any ideas?

================================
Large scale conversion of gas to liquids will increase the demand for cobalt and other catalysts.

 
At 11/20/2011 8:12 PM, Blogger VangelV said...

The investment question is how this wil resolve itself? Any ideas?

Right now we are looking at around 75 mbpd of crude production. Depletion is running north of 6% so you are looking at the need to replace more than 4 mbpd of existing production each and every year with new production. The net returns on many unconventional methods are very low and in the case of the marginal shale areas, negative. This means that if the economy improves we will see a massive explosion of oil prices, which will benefit the low cost producers who generate huge amounts of cash out of existing production. Normally the biggest benefit would accrue to the low margin producers but I believe that given the huge overvaluations and the low to negative net returns on the energy invested that would be hard to justify even if prices are rising sharply.

But there is the other side. If we get another collapse you will see the low quality producers and the highly leveraged players in the shale sector go bankrupt very quickly. The bankruptcies will remove a great deal of rapidly depleting supply from the markets and the supply side reaction will keep the price collapse short. The cash rich conventional players will simply cut back on capital and wait out the negative environment, ready to come back strong when the market liquidates the lousy investments.

In short, I would be looking at the cash rich conventional producers as the best vehicle for speculation and would be willing to add to my holdings if another crisis comes along. I would not be chasing the overvalued shale players and if I were the gambling type would look to short Chesapeake and other companies with high shale exposure during the downturn.

 
At 11/20/2011 8:55 PM, Blogger VangelV said...

Large scale conversion of gas to liquids will increase the demand for cobalt and other catalysts.

And it will increase demand for specialty equipment, rare earths, copper, steel, nickel, and other base metals. It will increase demand for chemists, engineers, machine operators, welders, etc. The problem is supply of all these inputs. It takes time and a lot of capital investment all along the supply chain both in the manufacturing and the services side. The problem is that until there is a supply response, which will take a long time, prices will explode.

To see what I mean take a look at the cost overruns for the oil sands projects in Alberta. It was easy to design and plan the projects but once construction began it was discovered that the supply of inputs was not sufficient to permit the construction to take place at the budgeted levels.

 
At 11/21/2011 11:09 AM, Blogger Hydra said...

".........To see what I mean take a look at the cost overruns for the oil sands projects in Alberta. It was easy to design and plan the projects but once construction began it was discovered that the supply of inputs was not sufficient to permit the construction to take place at the budgeted levels."


Excellent analysis. the rare earths, nickel, and Iron are also used for catalysts, which I referred to as just "other" but I understand you are also including construction materials.

The Alberta situation is typical, and whenever I hear one of those Pollyanna suggestions that all our problems are over because of some new impending technology, I just smile.

The real world is more complicated than one line answers.

 
At 11/23/2011 6:56 AM, Blogger Hydra said...

Energy equivalence is not the whole story if liquid fuels are more convenient.

 

Post a Comment

Links to this post:

Create a Link

<< Home