Thursday, June 14, 2012

Today's CPI Report: Falling Natural Gas Prices

From today's CPI report, Table A:

Over the last year (May 2011 to May 2012), the category with the biggest drop in price was  "Utility (piped) gas service" (residential natural gas), which has decreased by -14.9% over the last 12 months.

Thanks to the shale revolution and falling natural gas prices, U.S. consumers have saved $35 billion in 2009, 2010 and 2011, and  it looks like those savings will continue in 2012.  

26 Comments:

At 6/14/2012 10:09 AM, Blogger VangelV said...

Thanks to the shale revolution and falling natural gas prices, U.S. consumers have saved $35 billion in 2009, 2010 and 2011, and it looks like those savings will continue in 2012.

You are ignoring the capital destruction. The shale gas producers blew their brains out and had to add massive amounts of debt to their balance sheets just to stay in business. Now that drilling for shale gas is not being financed drilling is falling and the only thing keeping prices down is a contraction in the real economy and relative strength of the USD versus the Euro. Given the poor state of the US financials I expect to see a number of shale producers go down this year. And while a collapse in demand my push or hold down prices supply will not provide a solution.

 
At 6/14/2012 10:23 AM, Blogger Buddy R Pacifico said...

Natural gas will save consumers money and drive up production of chemicals and plastics.

Electricy generation will be a massive market for plentiful natural gas in the future.

"... according to the EIA, natural gas-fired electricity generation is expected to account for 80 percent of all added electricity generation capacity by 2035." Link.

 
At 6/14/2012 10:36 AM, Blogger Jon Murphy said...

NatGas has really been amazing for the past three years. Falling $10 per thousand cubic foot. Even if prices settle in the $3-5 dollar range (which my people in the industry tell me will likely be the new normal), that is still an amazing savings to consumers (especially considering the ten-year average has been about $6.)

Well, we shall see, no?

 
At 6/14/2012 10:41 AM, Blogger Jon Murphy said...

Another thing: I was just looking at the "savings" numbers that Dr. Perry posted. Those are only for end-use customers (people who use natural gas to heat homes and cook). If there was an easy way to measure savings from lower electricity bills, everyday products made with NatGas (like cleaning products), etc., the savings I bet would be much higher.

 
At 6/14/2012 11:07 AM, Blogger Che is dead said...

"Energy accounts for more than 50% of the costs for chemical companies. European chemical companies will be at a competitive disadvantage as the energy costs for U.S. companies fall due to low natural gas prices. This is evident from LyondellBasell's latest annual results. Its U.S. polymer segment saw an increase of 450bps in the EBITDA margins, whereas the polymer division in Europe saw a contraction of 570bps. As the capacity of Dow Chemicals (DOW) increases, along with decline in energy costs, it can take over market share from its European counterparts too. This cost advantage makes DOW a portfolio stock for next many years." -- How to Profit From the Shale Gas Boom

 
At 6/14/2012 1:46 PM, Blogger Rufus II said...

Best way to profit is just to go long nat gas. Production Peaked in Jan, and is on a good solid trajectory Down.

 
At 6/14/2012 5:13 PM, Blogger VangelV said...

Electricy generation will be a massive market for plentiful natural gas in the future.

"... according to the EIA, natural gas-fired electricity generation is expected to account for 80 percent of all added electricity generation capacity by 2035." Link.


No chance in hell. US conventional reservoirs were exploited a long time ago and are now at the back end of Hubbert's curve. Tight production from shale formations is insufficient to meet demand for a fraction of total electrical demand.

 
At 6/14/2012 5:15 PM, Blogger VangelV said...

NatGas has really been amazing for the past three years. Falling $10 per thousand cubic foot. Even if prices settle in the $3-5 dollar range (which my people in the industry tell me will likely be the new normal), that is still an amazing savings to consumers (especially considering the ten-year average has been about $6.)

Well, we shall see, no?


See what? We have already seen the negative cash flows and exploding debt. We have already heard CEOs admit a cost of production that is more than twice the market price and the headwinds of funding gaps that have to be filled by selling off valuable pieces of the company.

 
At 6/14/2012 5:17 PM, Blogger VangelV said...

"Energy accounts for more than 50% of the costs for chemical companies. European chemical companies will be at a competitive disadvantage as the energy costs for U.S. companies fall due to low natural gas prices. This is evident from LyondellBasell's latest annual results. Its U.S. polymer segment saw an increase of 450bps in the EBITDA margins, whereas the polymer division in Europe saw a contraction of 570bps. As the capacity of Dow Chemicals (DOW) increases, along with decline in energy costs, it can take over market share from its European counterparts too. This cost advantage makes DOW a portfolio stock for next many years."

This smacks of the, "How to Profit From the Housing Boom," advice. You make an assumption that makes no sense logically and sit back until your investments get wiped out.

 
At 6/14/2012 5:29 PM, Blogger Che is dead said...

"This smacks of the, "How to Profit From the Housing Boom," advice. You make an assumption that makes no sense logically and sit back until your investments get wiped out." -- Vag

My highlighting the story wasn't meant as investment advice, it was meant to show how natural gas, as an input, effects the economy generally. Either way, it's only a matter of months now before the whole industry comes off the rails and you join the likes of Jimmy Rogers as an investment legend.

 
At 6/14/2012 5:46 PM, Blogger Jon Murphy said...

See what?

What the future holds, of course!

 
At 6/15/2012 2:52 PM, Blogger marmico said...

Thanks to the shale revolution and falling natural gas prices, U.S. consumers have saved $35 billion in 2009, 2010 and 2011, and it looks like those savings will continue in 2012.

You conveniently forget the other side of the ledger.

Thanks to... falling natural gas prices, U.S. royalty lessors, producers and government, etc. lost $35 billion in 2009, 2010 and 2011, and it looks like those losses will continue in 2012.

 
At 6/15/2012 3:04 PM, Blogger Jon Murphy said...

Thanks to... falling natural gas prices, U.S. royalty lessors, producers and government, etc. lost $35 billion in 2009, 2010 and 2011, and it looks like those losses will continue in 2012.

That is not strictly true. As royalties, taxes, etc., are percentages of the price received, then their losses would be a percentage of the gain consumers get. Of course, that is assuming consumers don't consume more of the gas now that it is cheaper (not the case thus far, but with low natural gas prices likely going forward, this could be the new case).

 
At 6/15/2012 3:07 PM, Blogger Jon Murphy said...

That is also assuming the savings from consumers isn't used in other ways that could generate additional tax revenue, royalties, etc.

It's the old zero-sum fallacy, that one's gains must come at another's expense. That is the surest way to find someone who does not understand economics.

 
At 6/15/2012 3:14 PM, Blogger Mark J. Perry said...

Amen, Brother Jon.

 
At 6/15/2012 3:18 PM, Blogger Mark J. Perry said...

It would be like saying that consumers have saved billions of dollars over the last decade from falling computer and software prices, and those gains have come at the expense of losses for companies producing those products like Apple and Microsoft.

 
At 6/15/2012 4:12 PM, Blogger VangelV said...

That is not strictly true. As royalties, taxes, etc., are percentages of the price received, then their losses would be a percentage of the gain consumers get.

But you are missing the point that all those are pure profit. The consumers get some of that as gains but still have to pay for all of the infrastructure depreciation, delivery charges, etc. The consumers actually did not see their costs drop by nearly as much as the producers saw their revenues fall. Note that not long ago we were talking about a price decline to $14 per Mcf for consumers. That is a multiple of the wellhead price that the producers get. A producer saw a decline in revenue of more than $4 per MCF while the consumer got a reduction of $1.20.

Of course, that is assuming consumers don't consume more of the gas now that it is cheaper (not the case thus far, but with low natural gas prices likely going forward, this could be the new case).

How does this work in any environment?

If the shale gas producers need $7.50 per Mcf to break even just how long do you think that they can add debt to stay in business so that they can sell gas at $3 per Mcf? In the real world things do not work this way and the consequences of the reality of the market place cannot be ignored. If we fall into a recession that takes oil lower you could see around 80% of the shale producers go under. Anyone investing in the sector knows that tight oil and gas formations have problems with depletion. That is not a big problem when prices are high and drilling is simple but a serious issue when you are drilling long laterals at depth and have to pay $7-$10 million per well.

 
At 6/15/2012 6:40 PM, Blogger marmico said...

You are so thin skinned in your sand box, Perry. So be it.

You made a basic economic accounting equilibrium boo-boo.

Take an accounting course Murphy. Aggregate income equals aggregate expenditure.

 
At 6/15/2012 9:38 PM, Blogger Jon Murphy said...

If the shale gas producers need $7.50 per Mcf to break even just how long do you think that they can add debt to stay in business so that they can sell gas at $3 per Mcf?

Simple, if a company cannot produce at the market level, they will go under. Successful companies will adjust to the new market price. My clients have done so. A recent conversation with one said that their new BE is just over three dollars per. Dynamic companies adjust to new markets. Static ones die. That is how the marketplace works.

 
At 6/15/2012 9:42 PM, Blogger VangelV said...

Simple, if a company cannot produce at the market level, they will go under. Successful companies will adjust to the new market price. My clients have done so. A recent conversation with one said that their new BE is just over three dollars per. Dynamic companies adjust to new markets. Static ones die. That is how the marketplace works.

Dynamic companies cannot change the laws of nature. If the energy content in the shale is too dispersed its concentration will take more energy than the product. I look at shale producers all the time and have yet to see much success in generating positive cash flows by any of them. The fact that the industry is not self financing tells us all we have to know about how profitable it is. And if you paid attention you would know that the stated reserves depend on much higher market prices. Pretty soon many of the companies will have to write down those reserves on the basis of a new market price and we will see their shares cut in half. The only way to prevent that would be from much higher prices but that would ruin Mark's story.

 
At 6/15/2012 9:51 PM, Blogger Jon Murphy said...

Take an accounting course Murphy. Aggregate income equals aggregate expenditure.

Ah yes...the old Keynesian theory that has been discredited. I remember learning about that in my economic history course.

In a purely accounting sense, yes that is true. However, in an economic sense, it is false.

Consider this:

I give you $3 for a loaf of bread. In the pure accounting sense, my expense of $3 is your income of $3. In an economic sense, my expense of $3 is less than or equal to my income of the loaf of bread and a similar situation on your end. Through this transaction, each one of us is better off.

But let's stick with the $35 billion number. What you are saying is that the economy is no better off, that the $35 billion in savings is equal to the $35 billion in loss. Under that logic, it wouldn't matter what the price is of anything, as the equation would have to hold. Economic growth could not occur if such conditions were true. So, what is missing? The multiplier effect. Consumers save $35 billion. They spend some of that money. That money gets multiplied throughout the economy as more people spend and spend. Some of it will make its way back to governments in the form of tax revenues, or to the natgas companies in the form of increased sales (to chemical companies, for example). So, in reality, it is not a simple Zero-Sum situation. It cannot be.

If your assumption were true, than price level wouldn't matter. The economy would remain stagnant no matter what. Historically, that is simply not the case.

 
At 6/15/2012 9:55 PM, Blogger Jon Murphy said...

I look at shale producers all the time and have yet to see much success in generating positive cash flows by any of them.

Then you are looking at loser companies. My clients have adapted to the new climate. Once prices rise above $3 (and they will), my clients will be in a winning positions. Your companies will die if they cannot adapt. Sorry to hear that. i'm sure they had a good run, but if they are unwilling to invest in the technology that is out there to help make themselves profitable, then it will free up resources for those companies with a future.

 
At 6/15/2012 10:16 PM, Blogger marmico said...

Your an idjit Murphy and I don't know why Perry protects your sorry ass.

Gross Domestic Income = Gross Domestic Product (Expenditure).

You can fantasize about zero sum fallacies until the the lights go out on the rig in your backyard. Maybe then you will unsuccessfully turn on the dim light in your brain.

Did you ever hear about the old saw, probably written down in the barter economy days, that "one man's income is another man's expense"? It is one of the founding principles of economics. Take an economics history course.

Tit for tat.

 
At 6/16/2012 4:10 AM, Blogger Ron H. said...

"I give you $3 for a loaf of bread. In the pure accounting sense, my expense of $3 is your income of $3. In an economic sense, my expense of $3 is less than or equal to my income of the loaf of bread and a similar situation on your end. Through this transaction, each one of us is better off."

Absolutely. If you valued the loaf of bread at exactly $3, you wouldn't go the the trouble of making the exchange, but would just keep what you had in your hand already.

 
At 6/16/2012 5:30 AM, Blogger VangelV said...

Then you are looking at loser companies. My clients have adapted to the new climate. Once prices rise above $3 (and they will), my clients will be in a winning positions. Your companies will die if they cannot adapt. Sorry to hear that. i'm sure they had a good run, but if they are unwilling to invest in the technology that is out there to help make themselves profitable, then it will free up resources for those companies with a future.

I am looking at the companies that have spent big on the new technology. But that technology cannot do anything about the laws of nature. Yes, you can make money at $3.00 if you are in the sweet spot of the best formations but there are very few of those and they deplete rapidly. The production is not sustainable and certainly not capable of generating profit if grown.

I think that what you are also looking at is 'profit' that comes from accounting assumptions that are not valid. Let me pick the EUR and I can generate profit at any price. But that does not matter because the story is told by the cash flow statements and the balance sheets. If I stay in business by adding debt my profit is illusion.

I suggest that your clients pay you as quickly as possible because there will come a day when you will be lining up with the rest of the creditors looking for pennies on the dollar owed.

 
At 6/16/2012 9:26 AM, Blogger Jon Murphy said...

Your an idjit Murphy

If you object to my explanation, then I invite you to present another. However, calling me a slur and repeating your last sentence is not an argument.

If you have a rational answer, then I invite you to share it. If all you are going to do is reduce yourself to slurs, then I have better ways to spend my time. Good day, sir.

 

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