Friday, January 13, 2012

Six Big Results of $3.53 Natural Gas in 2012

The U.S. Energy Information Administration is forecasting $3.53 for the average annual spot price of natural gas in 2012 (see chart above), which will be almost 12% lower than the average price this year of $4 per million BTUs. In the first few weeks of this year, the spot price of gas has been below $3 (data here). 

What are the six big results of $3.53 natural gas in 2012? According to energy expert John Hanger:

1. "Still lower natural gas bills for consumers, with a residential consumer saving probably another $45 on top of the $500 per year the gas price drop from 2008 has already provided.

2. Still lower electricity bills for those consumers in competitive electricity markets where natural gas pricing importantly impacts electricity prices. All other things being equal, another 50 cent decline in gas prices could reduce electricity bills by about 0.5 cents per kilowatt-hour and save electricity consumers about $50 during 2012. This $50 saving would be added to $500 per year in electricity costs that lower natural gas prices have already provided.

3. Lower natural gas bills and electricity bills will again prevent a broad energy shock, even though oil prices are at record levels for a full year and would go much higher if conflict with Iran erupts.

4. Another decline in the number of producing shallow, traditional gas wells in Pennsylvania will take place. 

5. Gas will continue to displace coal in electricity generation. Power plants that can run on either coal or gas will use gas. More decisions will be made to convert coal plants to gas. Gas's electricity generation market share will rise and coal's fall to below 43%, into the 42% zone.

6. More natural gas displacing coal and oil will cut carbon emissions and other pollutants like soot and mercury. US carbon emissions will likely fall in 2012, in significant part due to natural gas.

John Hanger's Bottom Line: The 2012 pricing may well be the new floor on gas pricing. It is really hard to see how prices can go any lower, given that gas demand is rising, more drilling rigs are moving to oil, and prices are so low that more marginal wells are being shut in. EIA itself is forecasting an increase in gas prices for 2013 to $4.14, up but sill low.

Finally, perhaps another year of record gas supplies and establishing a new floor on gas prices will mean that the ridiculous smear that shale gas is a "Ponzi Scheme" and those that spread it will be ridiculed by one and all in 2012. I am not counting on that one, but another year of low, low natural gas prices looks almost guaranteed."

HT: Robert Kuehl 

36 Comments:

At 1/13/2012 10:59 AM, Blogger rjs said...

7) at this price, a lot of suckers who invested in the gas production boom are gonna lose their shirts...

 
At 1/13/2012 11:13 AM, Blogger Methinks said...

The 2012 pricing may well be the new floor on gas pricing. It is really hard to see how prices can go any lower, given that gas demand is rising, more drilling rigs are moving to oil, and prices are so low that more marginal wells are being shut in

Never underestimate the power of technical innovation to reduce exploration and production costs.

Don Evans, formerly of Tom Brown Energy, used to open every quarterly analyst conference call reminiscing about the high price of gas and shallow wells of the past. He constantly reminded us how much deeper gas producers are drilling, how much more they're getting out of wells and how much cheaper the commodity has gotten at the same time.

 
At 1/13/2012 11:24 AM, Blogger Benjamin said...

The reality is also that wells are not shut in until the marginal costs of production are higher than the marginal costs. In short, wells will keep on producing gas for a long time. Add on, in Ohio oil drillers will soon commence the hunt for shale, but bring up gas as a byproduct.

Add on, the globe is funding huge amounts of natural gas seemingly everywhere. The biggest flowing gas well in all history was found off go New Guinea just a couple years back.

Add on, China will be drilling for natural gas, with much lower capital and labor costs and an incentive to displace imported oil.

It may be that under $3 will not sustain gas production in the USA. But it could become the world price for natural gas for a long. long time.

As with oil, lower global prices may squelch expensive US production in the decades ahead.

But I see abundant supplies for years and years before that.

The private sector produces more with less every year. The federal agencies, including the military, produce less for more every year.

 
At 1/13/2012 11:42 AM, Blogger Che is dead said...

"Finally, perhaps another year of record gas supplies and establishing a new floor on gas prices will mean that the ridiculous smear that shale gas is a "Ponzi Scheme" and those that spread it will be ridiculed by one and all in 2012. I am not counting on that one ..."

Vange?? Vange?? Are you there? Someone is speaking to you.

 
At 1/13/2012 12:27 PM, Blogger AIG said...

"Power plants that can run on either coal or gas will use gas"

I don't think there are many that can use coal AND gas. Typically they will have separate boilers. Phasing out of coal by gas, is more likely.

"Vange?? Vange?? Are you there? Someone is speaking to you."

He's listening to a Lew Rockwell podcast about, gold and drugs and Cambodia and tin foil hats...or something along those lines. Don't bother him now.

 
At 1/13/2012 12:53 PM, Blogger Common Sense Capitalism said...

I'm wondering what the impact will be on propane. I paid $1.89 in October and a few weeks ago, topped the tank off at $1.99. I wasn't sure if the supplier raised the price due to the time of the year or if propane actually went up.

 
At 1/13/2012 1:08 PM, Blogger VangelV said...

I am with rjs. There is no way for the shale producers to make a buck at such low prices. That means that over the longer term we will either see lower production levels as drilling activity is reduced or higher prices.

The deciding factor is financing. Many banks are on the hook for a lot of money that they will never get back so they are likely to hold their nose and lend even more cash to companies that need to drill or risk losing their leases. But on the other side of the market we have the short sellers who must be licking their lips as they look at the overbought conditions on the shale equity side and oversold on the shale gas side. Eventually they will make public the fact that the math does not work for the producers and the fools who are building facilities that will use gas by betting on low cost production. Something will break. The only question is when.

 
At 1/13/2012 1:10 PM, Blogger VangelV said...

The reality is also that wells are not shut in until the marginal costs of production are higher than the marginal costs. In short, wells will keep on producing gas for a long time. Add on, in Ohio oil drillers will soon commence the hunt for shale, but bring up gas as a byproduct.

Look at the depletion rates. Shale gas wells do not produce for a long time. Most are done by the fifth year even though the sales pitch from many of the producers is more than a decade. To see the future for most producing areas look to Montana's Elm Coulee field.

 
At 1/13/2012 1:11 PM, Blogger Mike Sproul said...

Any explanation for those price spikes shown in the graph?

 
At 1/13/2012 1:16 PM, Blogger Benjamin said...

BTW, who sats natural gas prices are so "low". ?????

If you look at the chart provided by the able Dr. Perry, gas prices were also "low" in 2000.

We see gas below $2 through all of the 1980s-90s, and under $1 through the 1970s (on other charts).

Even adjusting fro inflation, we see natural gas has been cheaper n the past. And man usually gets better at commodities production, not worse.

And so now they are finding gas globally in huge amounts.

We are likely entering an era of cheap and abundant natural gas globally for generations.

And that is good news my friends!

 
At 1/13/2012 1:24 PM, Blogger AIG said...

"Something will break. The only question is when."

You're such a genius. The typical Lew Rockwell/Ron Paul/Tin Foil Hat approach to anything is...scream that things WILL END...SOME DAY...and eventually you will be right when that day comes.

Of course, everyone is well aware that nothing lasts forever, and that profitability in any industry and in any business will someday dry up.

But that is the whole...POINT. Create new alternatives that replace the older ones. Creative destruction.

The Lew Rockwell/Ron Paul/Tin Foil Hat approach of Vangel and co is the typical...COMMUNIST...mentality of "everything lasts forever". And if it doesn't, than its evidence of its failure.

Nothing demonstrates this...plainly idiotic...mentality as Vangel does. I remember when he said the "tech bubble" in the 90s was a negative because...it ended. Yeah, you're so right. It was a negative. The dirt cheap electronics and the blogs you're writing on are evidence of what failure creative destruction is.

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

This is why, at the end of the day, there is no practical difference between extremists on the left and on the right. Extremism leads to the same conclusion, by the same means.Case in point: Vangel.

 
At 1/13/2012 1:50 PM, Blogger Methinks said...

Mike Sproul,

I can't explain those particular spikes, but spikes in the price of gas are usually related to weather. Very cold winters in the Northern part of the country increased demand and very hot summers in the South increased demand.

Other factors can, of course, effect the price (like what's happening to supply), but weather is the main factor in spikes. At least that's what it was when I covered independents many years ago. Supply issues usually aren't worked out that quickly.

 
At 1/13/2012 1:50 PM, Blogger Methinks said...

Main reason for spikes, I should have said.

 
At 1/13/2012 2:01 PM, Blogger Hydra said...

You think we can get a big subsidy to run gas lines out to the rural areas?

 
At 1/13/2012 2:08 PM, Blogger Hydra said...

There is no practical difference between extremists on the left and on the right.

================================

Yep.

Both extremes think THEIR approach will save us money, but the fact of their approach being extreme actually costs more.

And in the end it is not even about approach, policy or beliefs: it is about power. We are going to have a lot of fun watching conservatives who are in favor of reducing government fighting against Obama's plan to -reduce government.

 
At 1/13/2012 2:08 PM, Blogger jorod said...

Not related but....Prescient article...Financial Analysts Journal, Vol. 60, No. 6, pp. 34-39, November/December 2004
Fairness Outside the Cocoon

 
At 1/13/2012 2:32 PM, Blogger AIG said...

"We are going to have a lot of fun watching conservatives who are in favor of reducing government fighting against Obama's plan to -reduce government."

I'm not even talking about that. I'm talking about loony-toon mises dot org type people who treat the 2 econ books they have ever read as the Gospel of Jesus H Christ. And just like religious fanatics, they have the same tactics : "Something will go wrong somewhere at some time! Heed our words! The end is near, at some time, at some place, in some form!"

PS: Did I read that right? Obama's plan to reduce government? I'll just take that as a joke.

 
At 1/13/2012 2:34 PM, Blogger morganovich said...

somehting to understand about nat gas prices that frequently gets left out of these analyses:

this is the henry hub price in lousiana.

price can do whatever it wants, but if there is no more space in the pipelines going out, quantity does not go up.

this makes pricing very sensitive to supply.

transport is pretty fixed. if you can sens 100mcf and there are 120 mcf fighting to get in the pipe, prices plummet, but usage does not go up.

thus, you do not get the big usage spikes you would expect from a commodity that has a more flexible distribution network.

this limits the benefits of low prices somewhat, as elasticity is mitigated.

we need pipelines, not more shale wells.

 
At 1/13/2012 3:51 PM, OpenID Sprewell said...

AIG, while you may be right about those doomsayers who always see a doomsday coming, Vange has made specific factual claims about this specific natural gas market. I'm not about to check his depletion claims and it appears you have not and are not about to either, so you can't really bash him about this. Trying to cover yourself by saying that "profitability in any industry and in any business will someday dry up" is just silly as timing matters and Vange is making predictions that a bust will happen much sooner than the natural gas optimists allow. I don't think you know much about the Rockwell/Paul crowd if you think they also think "everything lasts forever:" their whole point is often that the market is dynamic and so evades analysis by even "mainstream" economists and their equilibrium math.

As for the tech bubble, I'm not sure what Vange said about it but your statements are the only "idiotic" ones I see. Name one company making "dirt cheap electronics" that came out of the dot.com bubble. Name one that created "the blogs you're writing on" that was a stock darling during that bubble. You won't find any because they don't exist and that's not what the tech bubble was about. If anything, the tech bubble sucked up a lot of engineers into the pets.com and broadcast.com scams that delayed the real useful creations, like your electronics and blogs. There were only a few tech successes that came out of the hundreds of crap companies during the tech bubble, winners like Amazon, Google, and Paypal, but when you look at the hundreds of billions invested, that is a horrible record.

I'm not sure what you find similar between "extremists on the left and on the right" but I could more accurately say that "This is why, at the end of the day, there is no practical difference between partisans on the left and on the right." If you consider yourself a "moderate" and not a partisan, then it's even more accurate. It doesn't matter if you're "extreme," partisan, or moderate on an issue, what matters is if you're right.

"Extremism leads to the same conclusion, by the same means."

Perhaps you like the way that sentence sounds, but it is dead wrong.

 
At 1/13/2012 3:52 PM, Blogger VangelV said...

Even adjusting fro inflation, we see natural gas has been cheaper n the past. And man usually gets better at commodities production, not worse.

And so now they are finding gas globally in huge amounts.


Shale gas is not economic at $4 per Mcf. End of story. That means that gas has to become more expensive or many of the shale gas players have to reduce their drilling activity.

 
At 1/13/2012 3:57 PM, Blogger VangelV said...

You're such a genius. The typical Lew Rockwell/Ron Paul/Tin Foil Hat approach to anything is...scream that things WILL END...SOME DAY...and eventually you will be right when that day comes.

This is simple math. You can't self finance by producing a product for a higher cost than you can get on the market. That means that you have to depend on equity sales or financing. Neither can keep going forever but depending on what the monetary authorities do the bubble can last quite some time.

Of course, everyone is well aware that nothing lasts forever, and that profitability in any industry and in any business will someday dry up.

Really? Mark is talking about cheap natural gas for years even as the producers are talking about financing gaps on their conference calls and have to sell off properties to keep drilling their other areas.

It seems to me that few are paying much attention to the obvious.

But that is the whole...POINT. Create new alternatives that replace the older ones. Creative destruction.

Well, you just showed that you are not all that aware. The POINT is that the new alternative is not economic. Most players need $7-$8 gas to break even. At $3 they are having serious problems and $4.50 does not help much.

 
At 1/13/2012 3:59 PM, Blogger juandos said...

"The POINT is that the new alternative is not economic"...

So what are you saying vangeIV?

That technology is stagnant and NOT dynamic?

 
At 1/13/2012 4:25 PM, Blogger VangelV said...

This is why, at the end of the day, there is no practical difference between extremists on the left and on the right. Extremism leads to the same conclusion, by the same means.Case in point: Vangel.

First of all, if you had paid attention you would have noticed that I am neither on the right nor the left.

And since when is the defense of liberty considered an 'extremist' position? I would have thought that someone like you, who has yet to see a war that he does not like, would have the decency to stay quiet about extremism.

 
At 1/13/2012 4:59 PM, Blogger juandos said...

"And since when is the defense of liberty considered an 'extremist' position?"...

vangeIV! vangeIV! vangeIV!

Ahhh lad, don't you know that is such an outdated, old fashion point of view?

Its almost neanderthal like in these days of political correctness...

 
At 1/13/2012 5:45 PM, Blogger AIG said...

"AIG, while you may be right about those doomsayers who always see a doomsday coming, Vange has made specific factual claims about this specific natural gas market. I'm not about to check his depletion claims and it appears you have not and are not about to either, so you can't really bash him about this"

Thanks for pointing out the obvious that I don't want to waste my time analyzing the ramblings of a man who thinks infrastructure is measured by how "beautiful" an airport is, or whether the success of a technology is about whether it is around today or not.

I don't care about the economics of this or that example. I don't care either way. If its not economical, it won't happen. The point, however, is the pattern of loony-toons like him and Lew Rockwell.

"First of all, if you had paid attention you would have noticed that I am neither on the right nor the left. "

I'm not sure what the technical definition of a "loon" is.

"And since when is the defense of liberty considered an 'extremist' position? "

When one starts defining "liberty" and accusing everyone else's definition as being "anti-liberty"; ie when one becomes a loon.

 
At 1/13/2012 5:49 PM, Blogger AIG said...

"Ahhh lad, don't you know that is such an outdated, old fashion point of view?"

Yes because if someone SAYS so, it makes it so. Vangel only promotes liberty as long as America isn't involved in any way shape or form. If it is discovered that America had something to do with it, it automatically turns into imperialist aggressive statist militarist...hmm...I'm running out of BS.

This champion of "liberty" says that Dennis Kucinich is the second greatest politician in the US (after GOD himself of course, Ron Paul). lol. Yes that Dennis Kucinich.

 
At 1/13/2012 10:41 PM, Blogger VangelV said...

So what are you saying vangeIV?

That technology is stagnant and NOT dynamic?


No. I am just saying that horizontal drilling is not new technology and that the current system of shale production is too expensive.

 
At 1/14/2012 12:45 AM, Blogger james said...

I think natural gas is a great bargain at current prices. Theirs an exchange traded note trading under the symbol GAZ that tracts the price of natural gas using futures contracts.

 
At 1/14/2012 10:21 AM, Blogger VangelV said...

Trying to cover yourself by saying that "profitability in any industry and in any business will someday dry up" is just silly as timing matters and Vange is making predictions that a bust will happen much sooner than the natural gas optimists allow.

My claim is very simple. The shale gas bubble will only continue as long as easy money policies allow the producers to fill the 'funding gaps' that are talked about by management on the conference calls or as long as there is a bigger fool to buy properties.

And for the record I have noted that having conventional players buy uneconomic properties is not a foolish thing if those players use the SEC rules to hide their true reserve declines and management uses overvalued shares as a currency to purchase better reserves from smaller companies that sell for lower true multiples.

It is not 'cover' to observe that bubbles have a life of their own and that many can last longer than many rational people believe possible. We have already seen the shale gas producers admit that they can't make any money in gas yet we have people like Mark predicting that they will continue to drill and increase production. We have already seen good fields like the Elm Coulee peak after a very short period but the optimists have yet to notice and incorporate it into their forecasts.

I am noting that when you put everything together and look at the real production data the divergence from what we have been told is very large. That means that the depreciation costs were understated and that many of the producers will have to have write-offs that will be sold to naive investors as one-time just as Nortel and Lucent Technologies did during the tech bubble. Note that even the bigger players who had real businesses and products wound up losing money from operations during the bubble. It was not just the pets.com of this world. I am pointing out that the same thing is happening today in the oil patch. While the drillers are doing very well the producers are bleeding red ink because they can't sell their shale gas for nearly as much as it costs them to get it out of the ground. But the drillers have a big problem too. They have taken off a lot of debt to finance expansion and need the boom to continue for a while. If the drilling activity stops many of them will wind up in bankruptcy. While that will ultimately mean lower service costs for the viable conventional players the bubble is killing them today and makes it hard for many investors to stay the course.

I don't think you know much about the Rockwell/Paul crowd if you think they also think "everything lasts forever:" their whole point is often that the market is dynamic and so evades analysis by even "mainstream" economists and their equilibrium math.

Our friend has no clue about the what the Rockwell/Paul crowd believes. He takes his shots because he is a big-government conservative who does not like the idea of having the troops come back home from Germany, Japan, Korea, Afghanistan, Iraq, and all the other places where a succession of presidents have stationed them over the decades.

 
At 1/14/2012 10:29 AM, Blogger VangelV said...

I'm not sure what you find similar between "extremists on the left and on the right" but I could more accurately say that "This is why, at the end of the day, there is no practical difference between partisans on the left and on the right." If you consider yourself a "moderate" and not a partisan, then it's even more accurate. It doesn't matter if you're "extreme," partisan, or moderate on an issue, what matters is if you're right.

It clearly matters if you are right. But it also matters what you think is right. Our friends of the left believe that it is all right for government to take money from people who have earned it so that they can distribute it to those that the politicians consider needy. Our friends of the right also believe that it is all right for government to take money from people who have earned it so that they can distribute it to those that the politicians consider needy. The difference is their belief about who is 'needy'. In the case of the left, it likes alternative energy companies, big agriculture and big pharma, the big banks, the underemployed, the public unions, minorities, and the 'disadvantaged'. In the case of the right, it likes manufacturers, big agriculture and big pharma, the big banks, and the defense and security industries. Neither side has a problem with the morality of using force to take money from those to earned it in order to transfer that money to interest groups that the people who earned it may actually oppose. The Rockwell/Paul crowd believes that it is not moral to use the government's monopoly of force to extract tribute from the population. It believes in individual liberty and that means both the social liberty that our friend opposes, and the economic liberty that he also seems to oppose but not as much.

 
At 1/14/2012 10:31 AM, Blogger VangelV said...

vangeIV! vangeIV! vangeIV!

Ahhh lad, don't you know that is such an outdated, old fashion point of view?

Its almost neanderthal like in these days of political correctness...


The lefties at the Huffington Post agree.

 
At 1/14/2012 10:33 AM, Blogger VangelV said...

Thanks for pointing out the obvious that I don't want to waste my time analyzing the ramblings of a man who thinks infrastructure is measured by how "beautiful" an airport is, or whether the success of a technology is about whether it is around today or not.

Let me get this clear. You want to argue about the future of shale gas but have no interest in the costs of wells, the depletion rates, the cash flows, or the profitability of the production? Faith based arguments may be fine for your political and theological postings but I doubt that anyone will take you seriously when we are arguing actual economics and investing.

 
At 1/14/2012 10:42 AM, Blogger VangelV said...

I don't care about the economics of this or that example. I don't care either way. If its not economical, it won't happen. The point, however, is the pattern of loony-toons like him and Lew Rockwell.

But you are wrong. It was not economic to lend money to people who could not pay it back but as long as the government and the Fed were pushing the bubble it went on and on and on. Those of us that saw that the activity was not viable stayed away and did not get burned in ways that people like you, who did not care and did not pay attention, did. I imagine that many of the fools who are now underwater on their mortgages and have wound up losing most of their retirement savings wish that they did pay attention and that the did not participate in the NASDAQ and housing bubbles.

You need to dump the faith based approach and see reality as it is. Things that make no economic sense can last a lot longer than you think possible when you have a hampered market as we do today.

I'm not sure what the technical definition of a "loon" is.

Yours is a person who believes in freedom and understands the way the world works.

When one starts defining "liberty" and accusing everyone else's definition as being "anti-liberty"; ie when one becomes a loon.

When you support foreign occupations, water boarding and other forms of torture, indefinite detentions, and huge budget deficits you are anti-liberty by definition. Liberty is about individual freedom and in your version of society you trample on that freedom by supporting government bureaucracies, high taxation levels and a warfare state.

 
At 1/14/2012 10:54 AM, Blogger VangelV said...

Vangel only promotes liberty as long as America isn't involved in any way shape or form.

That is not true. I promote liberty. Period. You can't impose liberty by putting people in jail without trial, sanction assassination of American citizens who have never been charged or faced trial, support torture, indefinite detention, and a warfare state.

If it is discovered that America had something to do with it, it automatically turns into imperialist aggressive statist militarist...hmm...I'm running out of BS.

Actually, you seem to have an inexhaustible supply of BS. I oppose imperialism no matter who is responsible for it. End of story. I don't turn a blind eye to mutilation, humiliation, torture, and murder just because my own country was responsible for it.

This champion of "liberty" says that Dennis Kucinich is the second greatest politician in the US (after GOD himself of course, Ron Paul). lol. Yes that Dennis Kucinich.

I have never said that. I said that Dennis Kucinich was right about the war and is a much better man than Bush, Obama, Cheney, and most of the people in the current and previous administrations.

 
At 1/14/2012 10:55 AM, Blogger VangelV said...

I think natural gas is a great bargain at current prices.

I agree. The price is well below the cost of marginal production. That means that somebody is taking a big loss to sell you cheap gas.

 
At 1/14/2012 1:02 PM, Blogger Ron H. said...

juandos: "Ahhh lad, don't you know that is such an outdated, old fashion point of view?

Its almost neanderthal like in these days of political correctness...
"

Yes. It's such an easy concept to understand, even a cave man can do it.

 

Post a Comment

Links to this post:

Create a Link

<< Home