US natural gas prices are at record lows–about where they were in 1976, and at the low points in the 1990s, in today’s dollars (Figure 1).
Figure 1. US wellhead natural gas prices based on EIA data, adjusted to January 2012 price levels using US CPI All Urban Price data.
There are several reasons why US natural gas prices are so low:
- Our pricing system is based on short-term supply and demand, and storage facilities are limited. It is very easy for supply to overwhelm the system, and prices to drop very low in response, if there is a mismatch.
- US demand for natural gas has been fairly flat for the last 10 years, regardless of price. Of the four major uses for natural gas ((1)residential heating, hot water, and cooking; (2)commercial heating, hot water, and cooking; (3) industrial demand; and (4) electricity), only electrical use has been growing.
- Supply does not drop very quickly, even if prices fall, because producers need to continue to extract natural gas in order to repay loans and to comply with use-it-or-lose-it lease terms.
Besides variability, there are a number of other problems with depending on short-term supply and demand for pricing:
- Today’s prices appear to be far below the cost of production for some providers, leading to the likelihood of a shakeout.
- Unless price levels are higher and more stable, it is not clear that natural gas supply will grow over the next 10 or 20 years, making long-term investment in new uses (for example, vehicular use, gas-to-liquids, and pipelines to underserved areas) questionable.
- Natural gas prices in the US are much lower than prices elsewhere in the world (Figure 2, below). This means that there is likely to be strong demand for US exports of natural gas, most likely as Liquefied Natural Gas (LNG), competing with internal US uses.
Figure 2. Natural gas prices in the United States, Europe, and Japan, based on World Bank Commodity Price Data (pink sheet)
Ramping up natural gas production is now very much of interest, even if new sources of demand are not available, because
- Oil prices are high and some believe that natural gas can act as a substitute, and
- Natural gas seems to produce less CO2 than coal or oil.
It is not clear that the current natural gas pricing approach is up to handling this mismatch between supply and demand. In many ways, natural gas is a drill-it-as-you-need-it product, and our current market free-for-all does not recognize this.
Perhaps we should be considering a different method of regulating natural gas, since in many ways natural gas is essential. It is needed for balancing wind and solar PV, and for allowing us to continue to continue to heat our homes and businesses with natural gas. In the early days of gas, gas was regulated to produce a reasonable rate of return for providers. Perhaps something closer to this approach needs to be used again today.
If price is regulated, the amount to be drilled would need to be regulated as well, probably on a month-to-month basis. Higher prices would probably be needed under the new system to provide funds for more storage and for maintenance of pipelines, and to assure that US needs could compete with demand for LNG from overseas markets. I am doubtful that such a method of regulation would be feasible or would be politically acceptable, however.
In this post, I will explain these issues further.
Why natural gas prices are so low?
I see four reasons why natural gas prices are so low:
1. Storage is too full. Our immediate problem now is that storage facilities are too full for this time of year, leaving little space for additional natural gas supply to be added during summer months. This year’s warm winter contributed to this over-supply of natural gas because the winter’s draw-down from storage was lower than expected.
Figure 3. March 22 figure by the US Energy Information Administration showing actual natural gas in storage (red) compared to expected range.
2. Little growth in historical uses. One of the underlying reasons why there is a mismatch between supply and demand is the fact that since 1997, US natural gas consumption has remained close to flat, regardless of price (Figure 4, below). With very low prices in 2011, consumption rose by 2.2% in 2011 compared to 2010.
Figure 4. US natural gas consumption by end use, based on EIA data.
Natural gas prices recently have been low enough to compete with coal prices. Even at these low price levels, there has been little increase in industrial demand, and no effect on residential and commercial usage (for heating of buildings, hot water, and cooking).
Industrial demand used to be the largest source of natural gas use, but this has been trending downward. Part of this downward trend is likely related to industries moving overseas for reasons related to wages. (Part may be related to spiking natural gas prices, as well.) Residential and commercial use has not been growing because furnaces have been becoming more efficient, and because more attention is being paid to insulation and other conservation measures.
Figure 5. US dry gas supply, divided between US produced and net imports.
3. Supply doesn’t drop quickly. Natural gas supply (Figure 5, above) does not drop very quickly when prices drop too low because long lead times and large investment is needed to bring supply on-line. Natural gas producers have debt to service and are often faced with “use it or lose it” leases, so are hesitant to stop, for fear of not being able to make use of their investment. A decline in price may be hedged, so the producer does not feel the effect as quickly as otherwise, and take appropriate action.
Profitability of individual wells is based on estimates of long-term future production and future costs–things which are not at all certain. Some small producers may not even be aware of how unprofitable current prices really are.
There is also the issue of large oil and gas companies having difficulty “replacing their oil reserves,” and needing natural gas reserves to substitute for oil reserves. These large oil companies are willing to buy natural gas companies, even if the cost would seem to be far too high, given recent prices. These willing buyers allow production to keep expanding, creating a greater over-supply situation before a shake-out occurs.
It might be noted that supply (Figure 5) is actually not rising very quickly, but given the slow rise in demand (2.2% in 2011), it is overwhelming the system. In 2011, US production of dry natural gas increased by 7.8% over 2010, but this increase is partly offset by an offset by a decrease in imports. When net imports are included, US dry gas supply for 2011 is up by 3.9% over 2010. The low growth in natural gas demand in 2011, plus the warm winter extending into 2012, has been enough to produce very low natural gas prices.
4. New demand doesn’t ramp up quickly. It takes time to find investors for new uses for natural gas. As I will discuss in later sections, there also needs to be reasonable assurance that natural gas will be available for a fairly long period at an acceptable price level, before investors are willing to invest. With our current pricing system, I am not certain that these criteria are met.
Natural Gas Supply Depends on a Sufficiently High Long-Term Price
There has been a lot of discussion about how much shale gas supply will be available in the new few decades. What people seem to lose sight of is the fact that the amount that will be available depends on price. If the US can maintain a high price for natural gas (say, above $10 per thousand cubic feet (mcf)), then a fairly large amount of natural gas may be available. But if price remains in the low $2 mcf range, or is highly variable, a drop in natural gas supply seems likely, probably in the next year or two. Companies will either not want to invest, or will invest for export to foreign markets, where prices can be relied on. Drilling rigs are already being repurposed for oil production, rather than natural gas production.
Figure 6. Natural gas drilling rigs as percentage of oil and gas drilling rigs, based on EIA's compilation of Baker Hughes data.
Aubrey McClendon of Chesapeake Energy, a major shale gas producer, talks about trying to pull back as quickly as possible from unprofitable production, at current prices. Arthur Berman estimates that shale gas producers who are not able to subsidize natural gas production with profits from “liquids” need a price of $5 to $9 mcf to earn a minimum level of profitability.
Figure 7. Graphic published by EIA showing recent shale gas production.
Gas producers have natural gas reserves on their books, but these too, depend on the available price for natural gas. If the prices is too low, these resources may never be developed (especially if the gas is a stand-alone product, not produced with “liquids”).
Building New Sources of Demand Depends on Having a Stable Long Term Supply
There are several new sources of demand that could be added, such as natural gas vehicles, or gas-to-liquid plants, or pipelines to underserved parts of the country that now use oil for heating. Large investment of these types don’t make sense unless there is a reasonable likelihood that increased natural gas supply will be available for 20 or more years, and as we just noted, such a supply is not likely to be available unless natural gas prices rise and remain high.1 While there have been technology improvements, there is little evidence that they bring the cost of production down to today’s low prices for shale gas producers that do not have high “liquids” content in the mix they extract.
Of course, the flip side of the need for higher price for production is that demand for the new products will be lower with a high natural gas price. This is true both for new products, and existing uses, like electricity. The recent rise in the use of natural gas for electricity occurred in part because natural gas became competitive with coal pricing. If natural gas prices rise, electrical demand for natural gas is likely to stop rising, and may even fall.
Need for a Different Pricing/Supply Mechanism
Both producers and consumers have gotten the message that we have an energy problem, without a good understanding of what that energy problem is. Suppliers are working hard to ramp up natural gas supply. At the same time consumers and industrial users are trying to conserve.
Vaclav Smil in Energy Transitions: History, Requirements, Prospects talks about transitions from one fuel to another taking 30 to 50 years. We are trying to rush the process with natural gas and renewables, producing a partial transition in only a few years. It is hard to move a system at faster than its normal speed. Even a small mis-step with natural gas can lead to very low prices, and no place to put the new supply.
Besides temporary over-supply, temporary shortages can also be expected to become more common, if we try to rush the transition, and do not add adequate new storage. Natural gas is a system that has a lot of month to month variability in demand, because it is used for heating and cooling. If the weather is unusually warm or cold, it is quite easy for the current system to run into outages. For example, Russia could not deliver enough natural gas for heating in Europe this winter; Texas had natural gas outages in cold weather in 2011. I wonder whether new natural gas vehicles will be added, and we will find that there are gaps in fuel for these vehicles, in some parts of the country, when the weather is unusually hot or cold.
I am not sure if any system of determining prices and supply will work very well, given the stresses we are placing on the system. The current system of determining prices on a short-term supply and demand basis produces a lot of fluctuations, and as I have shown, does not regulate the system well. I am raising the question of whether another system might work better because the stresses on the system would appear to be likely to get worse, not better, in the years ahead.
One possibility would be to go to more of a regulated natural gas system, where the amount drilled each month is set by a central authority, and prices are set based on a fair rate of return. I don’t know whether this is even feasible at this late stage, with ownership of different parts of the system so disaggregated, and cost levels varying greatly for different types of providers.
I suppose hidden in the back of my mind is a fear that the natural gas system (like the oil system) will start behaving so badly in terms of pricing and demand allocation that the government will decide to intervene. President Obama’s new Executive Order with respect to Natural Defense Resource Preparedness gives the Energy Department broad powers if problems arise that are deemed to create a national emergency. These powers would seem to include determining who gets what in terms of supply.
Trying to transition quickly from one energy system to another is untrod ground. I am not sure I have a good pricing solution. Perhaps someone else does.
Note:
(1) Having high natural gas prices is helpful in assuring long term natural gas production, but such prices are still not a guarantee of long-term production. There are many interactions with the rest of the system. For example, if there are high oil prices and high food prices, there may be civil unrest which disturbs natural gas production. Or imported parts, necessary for further drilling may not be available. Or there may be general financial problems, that prevent getting loans needed for further production. Or it may turn out that shale gas wells do not continue to produce as much gas as hoped, for as long as hoped, and the wells are no longer profitable, even at the higher prices.
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Let’s see being one of those poor disabled people who due to health reasons need to keep quite wasrm; If I could switcgh to natural gas in my fifth wheel my energy prices woyuld go down markedly and I would not have to worry anywhere as much about keeping the power on and warm. I know ther planet has finite rsources but do worry what seems to an unintentional agenda that really hurts poor people. I would like someone to propose a way to get around this uh “little problem”.
Although natural gas emits less CO2 than coal and can be helpful for integrating variable renewable sources like wind and photovoltaics into the grid, only large-scale deployment of carbon-free sources (renewables and nuclear) together with conservation, efficiency, and land use changes can make a significant dent against climate change. This is shown in a new study: http://news.nationalgeographic.com/news/energy/2012/03/120314-natural-gas-global-warming-study.
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Gail,
You repeatedly state that you see a crash in the financial system as an almost inevitable outcome of the current crisis, in that when growth no longer is possible the massive debts cannot be serviced.
What worries me far more than the price of natural gas or oil, and more even than the probable total loss of income I would suffer if such a crash would come about is this:
The global agricultural system is massively interwoven with the financial system, and would to a large extent go down, or at least be severely affected if a financial meltdown were to occur.
No money for seeds, fertilizer, diesel fuel, all the inputs that are needed for there to be a next harvest.
In short: A meltdown of our financial system would not just be an inconvenience in terms of not being able to heat our houses or get around in our cars, but could quite possibly cause a culling of human life within a short time frame and of a scale that it is unbearable to contemplate.
With your knowledge of how finance works, have you considered looking into the question of “food and the financial system”?
You are right about the financial system possibly putting an end to food.
One issue is probably loss of credit needed to buy farm equipment, seeds, fuel, etc.
Another issue is bad recession hitting, and price of oil and food dropping.Then there would be the possibility of farmers defaulting on loans on their property, etc.
Another is the indirect impact of multiple bank failures. I would think the government (assuming it is still functional) would print new money, but the new money might not work for imported goods.
If things get so messed up that electricity is a problem (perhaps because there is not a way to pay workers because the banking system is such a problem), then we would have truly major problems, not just with agriculture.
I will have to think about your idea. Thanks for the suggestion!
I would just point out that the financial/food scenarios are relative to each other. Printing money in a country where seed, machinery, fertilizer, diesel fuel is also produced to export food is a lot less disruptive then a country (like Egypt) which has to import food (50% of its wheat for instance) and many of the those inputs.
Whether those businesses can stay in business (in the US) that manufacture without financing or a much reduced food export business (because other’s can’t afford it), is an interesting question. I suspect Deere, and Monsanto can.
After a financial collapse real assets, such as agricultural land and other farming resources, like tractors and combines, will still exist. They will be used by someone to grow food. Perhaps they will be nationalized and leased back to the bankrupt original owner. The same goes for electricity generation. We need not immediately “starve in the dark” just because of a financial meltdown. What that meltdown will do is scramble all the ownership of real assets and vaporize all financial assets.
It is also true that due to the likely collapse of the existing parts supply chain there will be a rapid reduction in production automation (including in the agricultural and electricity sectors). This is good, because there will be a huge pool of otherwise unemployed labor that might find meaningful work manually operating critical facilities as they de-automate, assuming that we can maintain functionality during rapid de-automation. If not, most people will indeed starve in the dark.
I agree that you are right, if we can keep up supply chains. We clearly need to be able to continue to buy oil products, and we clearly need to continue to pay workers. If these are disturbed, there is a problem. I see the issue of buying oil products from overseas to be a bigger issue than the issue of continuing to pay workers, but either could be an issue if, for example, the US government ceases to exist, and the United States breaks into smaller units, each of which need to establish their own financial systems and international trading agreements (some of which are with other US entities). This whole idea may seem odd, but look at Libya and the Former Soviet Union, and the current war in Syria. Stranger things have happened.
AKA the Fast Crash/Seneca Effect scenarios.
http://cassandralegacy.blogspot.com/2011/08/seneca-effect-origins-of-collapse.html
In the case of a rapid economic meltdown, my guess is the Military would take over the logistics of food production and distribution. Executive Order, Martial Law, all of Walmart’s distribution apparatus would be put under control of the Military, etc.
RE
http://www.doomsteaddiner.org
“Industrial demand used to be the largest source of natural gas use, but this has been trending downward. ”
The US industrial production of natural gas in 2011 was the largest since 2004.
The natural gas glut didn’t materialize until 2009. During the two years since then, industrial consumption of gas has been growing at roughly 5% a year.
This looks like reasonable response to price signals to me. People in the commodity business don’t sneeze at 5% growth per year from their second largest customer base.
Perhaps that is a reasonable way of looking at it. It takes a while to respond to price changes. Industrial demand was headed down for a long time, and now is heading back up, from a lower base.
It will be interesting to look at those industrial numbers as time goes forward. I was quite impressed with the growth during an otherwise lackluster economy.
In the meantime, the “gas glut” is probably at worst a mixed blessing for the American economy. Cheap electricity (which is inevitiable from a glut of the fuel for marginal electrical production) and cheap natural gas mean the overall energy bill for the American economy isn’t terribly high, even with expensive oil. I believe we’re seeing this in the consumer spending numbers – people have the money to buy iPads, even though their commute isn’t cheap.
The Pickens Plan seems like a no-brainer at this point, especially if it was tweaked a bit to throw some more subsidies to wind. (Basically tax the frackers to pay for both windmills and gas infrastructure). I believe the D’s are holding that up more than the Rs. I’m guessing that if the D’s lose the Senate but Obama wins re-election, we might see the Pickens Plan actually emerge as one of the few areas of consensus between a D White House and an R Senate+House.
I am not sure that we really have enough natural gas to do the Pickens Plan, especially on very cold or very hot days. We would need to match supply and demand very closely.
I pointed out that the cheap gas was one of the reasons the US economy is doing better than Europe in Why high oil prices are now affecting Europe more than the US.
Yeah that “America better than Euro” post was good (albeit overly slanted to the downside, but that’s your schtick – it still had interesting info).
I think you’re wayyy overly worried about this “cold day/hot day = nat gas blackout” thing. There are a ton of people with natural gas piped into their house, and the overwhelming majority of them have had 10X as many electrical blackouts as gas blackouts. It’s really a minor technical issue re: delivery and storage, not a “market failure” (i.e. not the same thing as the gasoline shortages of the 70s).
I do think the Pickens Plan would blow through our natty gas reserves more quickly, as would LNG exports. However, creating jobs and saving customers money **right now** is probably more important than any long term resource plan. America doesn’t do resource planning more than 10 years out. We assume some new tech will come along every 10 years or so.
Despite what you might think, shale energy really is a new tech – it would be prohibitively expensive without sophisticated computer models and controls. Those frack drill jobs don’t happen without a trailer full of nerds guiding the drill bit just so. Shale has a ten year run, minimum, ahead of it. So I think the US will blow through it fast for the next ten years, and hope/pray that some new energy tech comes up to save their bacon in 2020.
You may very well be right (as long as the oil thing doesn’t blow up too badly, and mess up other things).
“as the oil thing doesn’t blow up too badly” – exactly! From an energy standpoint, the trick is to manage the oil to coal+gas transition for another 10 years or so (now that there appears to be enough gas). I am optimistic this will occur, since “oil to coal+gas” has been going on for 30 years, it can probably do it for another 10. If some better new energy tech or discovery doesn’t come along in 10 years, then there will be an ugly energy shortage … but that’s been true, more or less, since the dawn of the industrial age.
Another chart. Marketed natural gas production in the US during 2011 was only about 7% more than in 1973 http://www.eia.gov/dnav/ng/hist/n9050us2a.htm
History of regulation
onhttp://www.naturalgas.org/regulation/history.asp
I know I showed a chart similar to that in one of my earlier natural gas posts. Canada came to our rescue with some natural gas we could import, so the dip in consumption wasn’t as bad as the dip in production. Imports from Canada have been declining in recent years, which is part of the reason we needed shale gas to ramp up.
But I would think our long history of not being able to get natural gas to ramp up would make lenders a little wary of jumping on the band wagon, without fairly good assurance that the new natural gas production really would be there.
You neglected to mention the primary reason why NG prices are low. Fewer people can afford to buy the product, and it is a highly discretionary one. Down in the lower 48, just about everyone can throw on a sweater and turn the heat down. As more homes are foreclosed on, that is fewer homes which consume NG for Heat, and fewer that use Electricity generated by NG.
Both here and in the Eurozone, Oil and Refined product consumption of gasoline and diesel is cratering, at something like 5%/year. Relatively speaking, this energy consumption is more inelastic than NG, since the mobile culture depends on it. NG consumtion is a highly elastic commodity, and many people will simply not buy the product.
NG is suffering from collapsing credit in in the Energy-Money Equilibrium. The effects are more apparent in NG than they are in Oil, because NG is not as systemically important to so many facets of the economy as Oil is. However, Oil will eventually succumb to the same pressures here resultant from collapsing demand.
http://www.doomsteaddiner.org/blog/2012/02/29/energy-money-equilibrium-ii-the-modern-era-and-the-jenga-paradox/
RE
I mentioned “other conservation efforts” which in some sense brought in the issue of turning the temperature down. You are right, I probably should have mentioned more specifically the issue of people really not being able to afford it, and the fact that all the empty foreclosed homes do not use homes. People who want to be green and people who cannot pay their bills, both turn the heat down. Another issue I didn’t mention is people switching from gas to electric appliances (clothes driers, hot water, and cooking), and apartments heating with electricity, because it is easier to meter (and probably to install).
I didn’t have good information on the credit situation, and how it was affecting natural gas demand. It seems like expanding the use of natural gas vehicles would require a fair amount of credit, both for building the new vehicles and for building more refueling stations. There may also be a need to extend pipelines and add storage capacity. All of this would require credit.
It seems like there is a big difference between a gas and a liquid used as fuel. Gaseous fuels require large diameter pipelines for transport and thick-walled tanks for storage–all of this for a product which sells for a relatively low price. This runs up costs, and the need for financing. It is not hard to see why liquids are more popular.
“It seems like expanding the use of natural gas vehicles would require a fair amount of credit, both for building the new vehicles and for building more refueling stations”-Gail
No new vehicles need to be built for utilizing NG, gas engines are easily retrofitted for running on NG. The infrastructure of filling stations would need to be fit out with NG tanks, but the stations themselves are already there and unlike Electric, do not need massive High voltage wiring to be be put in place for rapid charging.
The problem of converting to NG for transportation purposes is more one of energy density and the speed at which the resource would be consumed if in fact you did try to convert the entire fleet of gas powered vehicles to NG. Not to mention also that an crashes would tend to be a bit more, well, EXPLOSIVE. Rupturing a pressurized NG tank blows a whole lot faster than a ruptured gas tank does.
Anyhow, NG can and likely will pick up some of the slack as liquid fossil fuels decline in avaialbility, but the energy density is such that any such conversion will rapidly deplete the NG resource itself. Basically, the transportation system is simply too energy consumptive, regardless of the energy source you are accessing. Nobody in their right mind would issue credit to develop this further, it simply cannot possibly pay off on the investment. Same as all industrial economics, it depends on a constant subsidy to exist at all. It cannot be sustained, and it will not be. The only question is for how long Goobermints will construct their economics around subsidizing such malinvestment. This could be a while longer, but it does seem the folks issuing the credit have grasped that the jig is up here, so probably not too much longer.
RE
http://doomsteaddiner.org
I think the key issue is that the vehicles are just too energy consumptive. It would be awfully hard to keep a balance between what little excess we have in a particular part of the country, and how many additional vehicles could be fueled with natural gas. A few city buses here and there might work, but as soon as the amounts start to get to be significant, we would start to run into supply problems, especially on cold days.
I have not seen a proper calculation of global NG consumption given a 100% transition of transportation (the only thing that matters) from oil to NG. Do you know of one?
Given the relative BTU content of the molecular carbon chains, it should be a calculation that is possible, and hence an assessment of what growth in NG production would be required.
To do the calculation, a person would need to know what proportion of oil use is for transportation. In the US, transportation use is about 70.5% of US oil use, according to this chart. This consumption percentage is on a barrel basis, not a Btu basis, but let’s suppose they are the same. According to this chart, showing 2010 US consumption by source in quadrillion Btus, 24.644 “quads” of consumption came from natural gas, and 35.970 quads of consumption came from oil. To transfer transportation use to natural gas use, we would need to use and additional 25.38 “quads” of natural gas, show US consumption of natural gas would need to more than double. The US is a net importer of natural gas, and our imports have been trending downward, so the need for new natural gas production would be higher yet.
Needless to say, there is the same issue with respect to using natural gas for electricity as well. It might be a reasonable issue to research further, and write a post on. Thanks!
Gail, if you’re going to perform the calculation, do not forget the LNG conversion energy loss of 30%. You need 1.3X the quad quantity coming out of the ground to achieve the quad level of energy in the fuel tank (because nat gas is used to power the refrigeration). And it does need to be LNG. The purpose is transportation and cumulative fuel tank refilling stops would take more time than travel time unless the fuel tank is LNG. And even with LNG the refilling stops are perhaps 5X what oil requires per unit distance traveled.
I think the quad basis is a legit starting point, but rapidity of consumption in 400 horsepower truck engines for nat gas may require some additional factor. I am thinking specifically of John Deere combines and tractors on 10,000 acre fields. They can’t drive to the LNG station. They’d use all of it up getting back to the field.
Maybe I should just do this calculation myself.
It might be good if you researched and wrote about this. My knowledge of LNG is not very good.
One guess is that the conversion of all of the equipment now using gasoline/diesel to use LNG would be a real challenge. LNG is very cold and needs a lot of insulation. What would this do to cargo/trunk capacity of trucks/cars? Also, I would think it would boil off in a few days, if not used. If that happens, it seems like it would be terrible for global warming? Could people keep such cars in their garages?
You must have missed a TOD discussion of a few days ago. Some guy from the industry showed up and actually quantitatively knew what he was talking about.
1) Loss from storage and transport of hyper cold LNG is surprisingly low. Dewar flask technology is pretty good, I guess. The quote seems to be only 1-2%/day boil off while stored or transported. That’s quite good for hyper cold, but an overall legit point in that a typical driver in the US fills a gasoline tank and does not expect to refill after . . . what, 10 days? This would be a differential equation of 1-2% X 10 over 36.5 such periods/yr but with the 1-2% being of a diminishing tank content over those 10 days. I’d estimate overall additional 15% (splitting 1% and 2%) required by the customer per year from boil off. Global warming issues do not interest me. It’s probably also valid to apply the 1-2% loss more broadly than the individual car. The big tank at the convenience store is losing 1-2%/day, too, before a customer shows up.
2) As for tank size, the reason it has to be LNG is unpressurized NG has 1/1000th the BTUs per unit volume as crude. That’s just reality for the chemistry of carbon chains. Pressurized NG, i.e., CNG, is still 1/4 lower. The Honda Civic is the best example. They pressurize the tank to 3600 psi. 1 Atmosphere is 14.7 psi. So they pump it up to 245X ambient pressure. That’s then 1/4th the energy content of gasoline per unit volume with some danger thrown in. That’s why the range of a Civic CNG is less than half that of a conventional Civic, even throwing away trunk volume to put a bigger, pressurized fuel tank there. CNG is just absurd.
LNG has 60% of the BTUs per unit volume as gasoline. An LNG vehicle would get 60% of the range of a conventional vehicle with the same tank size. The LNG problem is, of course, 30% of the NG coming out of the ground is used to power refrigeration of the NG to create LNG at the plant. So the oil -> NG transition has to endure 40% chemistry loss (crude just has more oomph per unit volume vs LNG), then 30% loss in freezing it and the 1-2% boil off loss/day.
Steep hill to climb. I’ll find some time to work on this and post a comment on it.
Thanks for the explanation. I am afraid I have not been following this as closely as I might.
@Owen – you seem obsessed with the alleged uselessness of CNG. You should travel someplace where they are common. CNG’s aren’t just for delivery vans and taxis – regular folks use them all the time for personal use. Just not in the states.
The range issue so bad. CNG cars still blow away electric cars for range. And many CNG rigs can flip in some fashion between gasoline and CNG.
For trucks – the energy density by volume is less important. Trucks are big re:less, so adding doubling or tripling the volume of the tank doesn’t really change things very much. The bulk of the truck volume is still, by far, the payload, not the CNG tank.
In the northeast there certainly has been conversions from heating oil to either ground source or gas for those who can afford the conversion, sometimes even wood or pellet stoves. And for those who can afford none of this, to turn the oil heat way down.
I have not heard this of gas users because the price has been going down, this very warm Winter/Spring has undoubtedly affected the gas prices due to much more limited use by even those who can afford it.
I do believe this will change in the future as NG goes up in price.
Around here, people use gas to heat. My impression is that people who are watching their pennies turned the gas down in the 2006 -2007 timeframe, and haven’t really raised the thermostat (especially at night and when out of the house) since then. I doubt that there are many more turning it down. A few may even be backsliding, if they have noticed that costs are down.
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I don’t think that Gail is unconcerned about global warming. It is simply that she specialises in the area of energy supply economics (for the purposes of this blog). She looks specifically at the finite nature of fossil reserves, EROEI and production investment trends. She also looks at the overall financial-economic system and the feasibility or otherwise of renewable energy . Gail is pretty much spot on all points except I would say she is a little too pessimistic about renewables. Having said that, I don’t think renewables will fully cover the gap as fossils fail.
We face a multi-pronged crisis and it has started. The recent troubles of MENA (Middle East and North Africa) are really caused by energy shortages and consequent shortages of food and other essentials. Europe’s economic woes do stem from the disastrous policies of economic neoliberalism but are now being exacerbated by energy prices.
The food and energy shortages crisis will hit harder (and is hitting now) before the climate crisis hits hard. However, we are also seeing climate change effects already. Rising storm frequency, alternating droughts and floods and general weather instability have already begun to take a toll around the world. Mix in overpopulation, species extinctions and environmenal degradation and you can see the trouble we are in. The Business As Usual model is breaking before our eyes. People are simply suffering denial. They can’t accept the truth because it is too terrible to contemplate.
All your points are well taken. My family is fairly well along in preparing for the collapse of BAU. In fact, I think that economic collapse will be the only thing that prevents us from burning up every bit of fossil fuel we can scrounge. It is a sad day when one must hope for such a thing in order to keep the world habitable for those remnant populations of people who survive this century.
I just get the impression from Gail’s post that she wants a “healthy” gas market so that gas can continue to be a reliable fuel source for the future. The world economy is so dependent on fossil fuels that most people find it hard to see them as the danger they are. While gas may be less dangerous than oil and certainly less than coal, policies that optimize gas production and consumption are only delaying the eventual decline in gas production, a decline that must be accelerated as much as possible (along with all fossil fuels). Unlike Gail, I certainly don’t want anything to be “helpful in assuring long-term natural gas production”.
Well how long term, is long term?
In the medium term gas production is, I think, going to be fairly crucial. It can and does replace crude oil as a basic energy feedstock in many areas.
If you understand, as I have come to, that renewable energy is not a viable alternative to anything at all, we as a species will need gas to tide us over to – hopefully – whatever is the actual next stage of civilization. If any civilization is going to survive, that is.
I feel that ultimately we are all on the same side – trying to ensure a reasonable environment for a reasonable world population. The differences arise because of incomplete knowledge of the overall picture and options available. There are no easy answers. We do not know how high fossil fuel usage will affect the environment (despite claims that we do) and we certainly don’t have an option in renewable energy (so called) despite claims that we do.
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The best that can be hoped is that discussion of the issues backed up by facts where they are actually available will in time lead to the correct choices being made at investment and government level, but we can, sadly, look forward to what Churchill described as ‘arriving at the right solution, after all the other alternatives have been tried first’ .
Biofuel, the hydrogen economy, so far no answers.
Renewable energy, so far, no solution.
It is easy to see why.
Biofuel which does produce a storable usable dispatchable fuel., runs at something like 0.1W to 1W per square meter of land. Land that is needed for food.
Hydrogen has to be made somehow, it solves nothing by itself.
.Wind operates at a highly variable average of about 1-2W/sq meter. Still phenomenally low in output for the space used. And generates nothing that can be easily stored or dispatched.. and uses a lot more materials because of its low average-to-peak pattern than conventional generation. We are short of copper as well..
Solar is reasonable at 100W/sq meter or so, but again, its not storable, and its still very expensive in terms of materials and land usage for the same reasons, and in many ways its worse than wind – winter and nighttime is when we need electricity the most.
In the end what is actually needed is not huge installations of wilful renewable energy that cannot be effificently dispatched: Its huge stores of energy that can be tapped as needed and is a willing contributor to demand, not something that has to be compensated for and fought against and used in conjunction with something else. And requires huge amouimnts of planet space to do so.
What we have available is fossil hydrocarbons and nuclear fuel. These work reliably and well. And at acceptable cost. At least direct cost. The argument should be on assessing the downstream environmental costs of both, and the costs of ameliorating them to an acceptable level.
Conceptually, dealing with a few thousand tonnes of nuclear waste is a lot easier than dealing with a few gigatonnes of carbon dioxide, if you trust the AGW proponents to be broadly correct. Of course that is in itself somewaht debatable, and there are glaring gaps int that peice of logical analysis too.. But in the longest term fossil fuels are not an option anyway – they are finite.
So of course are nuclear fuels, but its a far far longer term :-0
Approaching this from the supply side is a waste of time. Its the demand sidethat can be changed to a much greater effective degree.
We simply do not need to use any fossil fuels at all. Homo Sapiens managed fine for millenia without them. Knock down the population by a couple of orders of magnitude, and the system is renewable on pay as you go basis.
We do not need Nukes. They will only result in a Mass Extinction. We need a reduction to what is sustainable. This will be achieved one way or the other, in the Old Fashioned Way of the Four Horsemen.
RE
http://www.doomsteaddiner.org
In a way, there are too many things to talk about all at once, when people are denial about any of the problems. This winter’s weather was extremely strange, and spring has been just as strange. I am fairly convinced climate is changing, but I am less certain that at this late date we can really do anything to fix it. If climate had been stable for millions of years, but it looked like climate might change in the future, I would have more optimism that we could do something to fix it. I don’t like having more CO2, because of the harmful impact on the seas, and the impacts on other types of beings. If financial collapse is coming in the near future, I expect it will greatly reduce fossil fuel use, and will help the CO2 situation.
I agree with pjc that markets will provide a correction to the current oversupply of natural gas in the US. As Gail showed, the percentage of rigs drilling for natural gas is dropping fairly quickly. More importantly, absolute counts are dropping also (see http://www.wtrg.com/rotaryrigs.html), with natural gas rig count down over 25% since last year at this time. Even the combined total of gas and oil rigs has leveled off since the middle of last year, even with sustained high prices for oil. Since small amounts of change in oil and gas production/consumption can make for large price swings, I doubt that it will take long for gas production to fall and prices rise.
But Gail, I really don’t understand your concern that low gas prices are a problem, especially since you do not seem too concerned about the impact of fossil fuels on climate change. If gas becomes so abundant and easily extracted that the price stays low for an extended period, more and more fuel switching to gas will take place. We would then gradually switch over to gas from other fossil fuels. This is unlikely however, since the combination of gas exports and declining drilling will likely soon shrink the gas “glut”, causing a sharp rise in price. People who are purchasing gas contracts for four years out at only twice the current price are getting a bargain.
One thing that makes it difficult to compare rig counts over time is the fact that the “mix” is changing, with the proportion of horizontal rigs increasing. The number of horizontal rigs seems to be at close to an all time high, according to Baker Hughes rig data. Also, with the new fracking techniques, the amount of gas produced per foot drilled is increasing (but at a much higher cost per foot). So I am not sure what the true effect of the change in number of rigs is. But you are right, the number of units is down.
Even with improvements in technology, I am skeptical that we can now produce shale gas for anywhere near the prices that producers are getting, unless there is quite a bit of liquids to provide profitability. I don’t really see prices staying low for an extended period. I think we likely will see a drop in production and a rise in prices. It is hard to see that there will be enough price stability in this country for much development of long term uses here, other than export facilities. Derivative contracts give a false sense of stability. The real situation is that production needs to drop or increase to match demand, but the derivative contracts allow producers to hold off on change.
The reason I am not as concerned about fossil fuels causing climate change is that I think we are probably near a financial collapse situation anyhow. It seems to me that the collapse will most likely put an end to the vast majority of fossil fuel use. Any small difference between now and then won’t really matter.
“It is hard to see that there will be enough price stability in this country for much development of long term uses here, other than export facilities. ”
Really!? 5 billion already committed, another 25 billion planned.
http://www.pittsburghlive.com/x/pittsburghtrib/business/s_785201.html
This plant in LA is the equivalent of a 700 million dollar investment (cheaper because it’s being moved from Chile, but it’s still a big plant).
http://bloom.bg/zRjBGk
I wouldn’t bet on any significant slowdown of fracking or natural gas production in the next decade. You can make your own bets, but there seems to be a mountain of evidence that downstream consumers are taking this natural gas production seriously and investing in it’s continued existence.
As to exports – I would have guessed that the unholy alliance of environmentalists and domestic industry consumers would block export permits, but I could be wrong. Significant natural gas exports would be bad for Americans as a whole, but good news for the drillers and the landowners (the landowners that want to drill anyway. The landowners that want their land to remain pristine and untrammeled are not heading towards a sad end).
The projects in the links relate to ethane. Ethane is part of Natural Gas Liquids. I mentioned that natural gas with enough liquids is profitable, and you are showing evidence that companies are building facilities to use the ethane that is being produced.
The issue more has to do with wells that do not produce much liquids, so are mostly methane. Vehicles powered by natural gas would seem to be a use for this. Methane is what is filling up the storage capacity beyond what it can hold. Do you have examples of multi billion dollar project using methane? I know that there is talk of more vehicles using natural gas, but this takes a while to get started. If I were in the natural gas business, I would look for exports first, if these could be arranged, since the price seems to be much higher overseas.
“The projects in the links relate to ethane.”
The plants being built us the gas (methane, pure CH4, whatever you want to call it) as well as the ethane feedstock. They power the plant with CH4. Ethane is cracked by steaming and extreme heating. You think they are getting the heat and steam by burning oil? No, in a well developed economy like ours, industrial heat and steam come from natural gas.
They wouldn’t be building the plants in the US to exclusively consume a feedstock that is priced by oil – the price advantage is the natural gas (which is also a big part of why companies ship raw crude to the US, refine it, and ship the products abroad).
(Wasn’t this discussed in one of your old posts? It’s ok, I don’t mind being quizzed 😉
Increased refinery operation =more CH4 consumption. Increased ethane cracking = more CH4 consumption. Increased chemical processing in the US = more CH4 consumption. The heat and the steam and the general “make it work” energy comes from CH4.
Let’s be very clear, all these trends (even the KXL pipeline) are *****multi-billion dollar investments in increased CH4 consumption**** . Other chemicals might be the true “feedstock” but this is stoichiometry, not economics. Chem plants and refineries are big users of CH4.
You talk about new plants being built that burn natural gas. I think, though, that if we analyzed this closely, we would find that most of these new plants are focused on using the “high value” part of the products–the liquids. They use some CH4 in processing, but this is not at all proportional to the liquids they use, so at least so far, hasn’t brought the demand up.
I know natural gas is used quite a bit in the extraction and refining of oil, as I mentioned in an earlier post. I am sure this use helps keep natural gas demand up. Canada uses quite a bit of natural gas in oil sands production. Nitrogen fertilizer use could be ramped up, and as you say, chemical plants. There are many ways more natural gas could be used–the question is whether the increased use is happening at the needed rate to balance supply.
Widening the focus again, the greatest concerns are;
(1) Exhaustion of non-renewable fossil fuels proceeds apace without adequate conversion to renewable energy (either because of policy and market failure and/or because of technical barriers).
(2) Dangeruous climate change is being built in because we are consuming too great a quantity of fossil fuels.
There are some real problems with fossil fuels and with climate change, but I am not convinced we have found good solutions. The solutions we have that are inexpensive, and can be made with local materials are quite limited–for example heating hot water in something like a thermos left in the sun; and water wheels and small windmills, similar to those that dotted the countryside years ago. In some places near volcanos, geothermal may be a temporary solution, although it is high tech, and is not very sustainable for the long run.
I think that we are kidding ourselves if we think new renewables like modern wind turbines and solar PV will make any appreciable difference. The most likely effect of trying to ramp up investment in these is to move forward the date of the financial crash–but such a financial crash seems likely fairly soon, regardless.
I see the financial crash, whenever it comes, as likely leading to the end of most fossil fuel production and consumption. (Perhaps I am too pessimistic in this regard, though.) If I am right, the fossil fuel problem will be solved, pretty much on its own. This would be good news for the climate, but bad news for human population.
Gail, I think you are right about most of the problems you write about. However, I think you are a little too pessimistic about renewable energy potential. Note, I said “a little”. Energy will be short but perhaps not quite as short as you imagine. Having said that, there will still be much less energy available than under the current fossils regime.
A while ago I did some back of the envelope calculations for my suburb in Brisbane, Australia. It houses 16,000 people in about 5,000 dwellings. These are mostly detached houses but there are a few flats and units. In our sub-tropical climate, a solar hot water system with a 2 sq. m. solar collection area can make enough hot water for a family of four. Water heating accounts for 25% of a dwelling’s power use in my city. Therefore 8 sq m. might suffice to power a house.
However, let’s call it 10 sq. m. per house. So 5,000 houses by 10 sq. m. = 50,000 sq. m.
Let us double that for suburban commercial and municipal needs and double it again for inefficiencies and to power up storage for nights. Thus we have a need for 200,000 sq. m. collection. Let us assign double that area locally, that is 400,000 sq. m. for a solar farm and associated infrastructure, subs-stations and access roads etc. This is 40 hectares, about the size of one rather large shopping centre and all its outdoor car parks. Australian suburbs have spare space in most cases so it’s do-able if the materials are available. Materials are mainly glass, silicon, aluminium and steel plus copper etc.
However, that does not solve the transport energy problem which is probably an order of magnitude bigger. Perhaps transport could be solved by bikes, minibuses, buses and trains. I see no chance of a role for private cars. Remaining liquid fuels need to be saved for agriculture, heavy machinery and the military. Even then they will run out course. Thermal coal must be left in the ground if we are to have any hope of stopping runaway global warming.
I think you should look at the real usages of energy across most countries: Domestic heating is actually not the greatest usage in most countries, especially warmer ones. It also is at is least when the solar power is at its highest. Unless its very hot and you need aircon, the pattern of solar (PV or direct) is almost exactly out of phase with demand.
Lacking any realistic cheap long term high capacity storage of decent turn round efficiency, that leaves gas as the only possible balancing mechanism for intermittent renewables. However even that doesn’t really help: first of all it leads to dependency on the very fossil fuel the renewables were supposed to displace, and secondly the lower average fuel, and use of capital, efficiency of plant operating in fast ramp, low capacity factor high dispatch mode, and the possible market bias towards fuel hungry but capital cheap plant to cover peak demands, means that the actual carbon emissions reduction far less than simplistic analysis would suggest – and some sources suggest adding wind or other renewable power to a practical gas powered grid would in fact increase fuel consumption overall.
Where this leaves us sadly, is the final informed conclusion that renewable energy is a complete blind alley, driven only by political forces and having no real value either in reducing emissions or reducing dependence on fossil fuel.
The two features on intermittent renewable energy that are absolutely inherent to the energy source – the intermittency itself and the appallingly low energy density – cannot be offset in any efficient way. Renewable plant will always represent a physically massive and material inefficient bolt-on to conventional generation. It cannot function in isolation. And if, as many analysts have calculated, the effect of bolting it on is to barely change the fuel used for the better, and often for the worse, there remains no justification for it whatsoever, outside pure political perception of ‘addressing the climate change problem’.
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After three years of studying the issues, as an engineer, from a more holistic perspective than the renewable lobbies care to address, my firm conclusion is that if all the intermittent renewable energy in the world were switched off tomorrow, world emissions would not measurably worsen, and might in fact improve.
A report has recently surfaced that goes into this all in better words than mine, and in more depth.
http://www.templar.co.uk/downloads/hughes-windpower.pdf
The real choice is between conventional fossil power and nuclear power. Sadly renewables are (and in hindsight were always going to be) a complete distraction – a total blind alley that diverts attention from the uncomfortable truth that we are wedded to fossils and the only realistic alternative is in fact nuclear power, at this stage in technological development. And that is solely for electricity generation. Transport – especially air transport – has no alternative whatsoever.
Whilst we may envisage electric cars of limited range feeding electric trains of transcontinental speed and high capacity, and nuclear powered ships, aircraft have a particular need for an energy store of high safety and high energy density both in volume and weight, and realistically that leads directly to an air-combined kerosene (or thereabouts) hydrocarbon as being the absolute best fuel imaginable.
In the limit that is synthesizable from water+CO2, but at horrendous cost. And for the foreseeable future we may expect that fossil hydrocarbon to be the basic feedstock of all hydrocarbon energy products: The imbalances in the US gas market I think therefore are temporary – the next phase will be to incorporate the gas into synthetic energy products that are somewhat easier and safer to store and have more general utility.
When I look realistically at what the future energy situation will be, I see that ultimately its a very expensive and rare thing to use hydrocarbon fuel: The most efficient scenario is massive deployment of nuclear power with off peak being used to transform feedstock hydrocarbons into more useable fuels in the kerosene type range for transport use. Bulk carrier ships will be nuclear, electric trains will with intercontinental aircraft form the basis for the long range transport with fuel and electric cars acting as feeders into it.
Not a single windmill will be turning in 30 years time, and precious little solar PV. Well there are one or two places where windmills could actually make a difference – The US desert near the Boulder dam might be suitable where the wind could offset water use there, and allow a reasonably balanced generation with a high peak capacity from the hydro power which represents a de facto storage unit to back the wind power up. And similar location specific issues make windpower suitable for other countries that have high hydro capacity, but not quite enough rainfall to keep them operating at that capacity. But these have necessarily to be minority generators – the bulk of the world energy will still have to come from fossil or nuclear, and if fossil runs out that leaves the technology that dare not speak its name – nuclear – as the only viable alternative.
But that won’t happen while people cling to renewables as a ‘viable alternative’ – what the Hughes report refers to, as a ‘ convenient fairy tale for troubled times’…
Perhaps the reason I am more pessimistic is the fact that most of us don’t live in subtropical climates and don’t live in cities of 16,000. I don’t see that biofuels can scale up. It will be hard to feed people in cities, if we cannot keep the current industrialized agriculture system going, including the transport of food to cities.
If alternatives had scaled up better to date, I would be more optimistic about them. Our real issue is too many people in the world. Someone told me that Australia has the population of Texas in a continent the size of the United States. You folks are starting from a different position than much of the world.
I think those are fair comments, but grandparent poster said their suburb within brisbane is 16000 people. Population of brisbane + near by surrounding towns/cities is about 3 million, average block size maybe 700 square meters.
What you say about Australia is true, however it’s climate is more like California (rough guess) — think dry and arid with poor soil. Most of Australia is likely inaccessible for intensive sustainable agriculture — particularly when climate change starts to bite.
Gail,
What percentage of the over-supply might be due to the explosive initial production of non-conventional wells that Berman and one of Charlie Hall’s post-docs noted. These wells, apparently, have a similarly steep drop off of production and the graphs I’ve seen appear to have a lower area under the curves meaning that the longer-term production numbers are not favorable. As I understand it a lot of the hype being put out is based on production curves (and volumes) as found in conventional wells. So the longer term prospects may actually be much bleaker.
So, in other words, is it possible that the current glut may suddenly turn to scarcity when these wells don’t continue to produce at higher levels? Compound that with the possibility that the “sweet spots” that have high initial producers may turn out to be scarcer than hoped for and we could be looking at a real problem ten-twenty years out. Maybe?
George
George,
I think that future well-by-well drop off is a likely. If the price of natural gas is high, a producer can afford to service wells with very little natural gas coming from them. If the price of natural gas is low, this production pretty much disappears quickly. So this is part of my reason why I talk about needing a high price for natural gas. There is also an issue of which wells become worth drilling. If the price is high, a producer can afford to drill the more marginal wells, and perhaps space them more closely. It becomes worthwhile to drill outside of the sweet spot, so that production can go on longer.
I know Art Berman has been talking about the high cost needed to make even the sweet spot wells profitable in shale gas. He has phased it differently, though, saying that reserves are too high. Discussing the situation with him, it becomes clear that the discussion very much depends on price. At a high enough price, even crummy resources become profitable.
But I think you are right about there being a significant possibility that the current glut may change to scarcity. The likely outcome is that prices won’t go high enough, and producers will only be able to drill the sweet spots, and even these will drop off quickly.(Or there may be other reasons all together–banks fail, can’t get financing, etc.)
This article seems to imply that long term natural gas pricing contracts don’t exist. This is just nonsense.
Please look here.
http://futures.tradingcharts.com/marketquotes/NG.html
There are probably other long term natural gas contracts besides these, but these are the easiest to find and trade.
Natural gas for delivery 4 years out is priced at twice the current spot price. This allows for producers and consumers to make long term decisions, and to insure reasonable stability of pricing. These contracts are a big part of the reason why natural gas production is remaining strong despite the current pricing downturn, and why natural gas consumers can rely on reasonable pricing far into the future.
You seem to be making much out of the “natural gas outages” in TX,NM in 2011, and also the issues re: Russian supply to Europe. The latter is it’s own set of worms, and doesn’t really have anything to do with natural gas production or consumption in the US (except, possibly, to insure that Europeans will pay a premium for stable American natural gas exports).
The former is a technical issue that has to do with the mechanics of natural gas delivery and storage. When an unexpected and dramatic cold snap occurs, the consumption of gas might rise so high that “rolling blackouts” can occur. This is simply because the pipelines are limited in their transmission capacity. It doesn’t reflect some underlying failure in the national system of matching supply with demand. If this sort of thing were to become common, the local natural gas utility could invest in mitigation strategies (probably by contracting with a small number of large consumers to have some sort of back up system available). But this is extremely rare, and the TX,NM gas-blackouts affected a tiny, tiny proportion of national consumers.
In short – I fail to see how the current system is behaving badly. Natural-gas shortages were much, much more common in the nationally regulated natural gas system prior to deregulation in the late 70s. The history of natural gas in this country is one where deregulation (along with long-term contracts) worked very well for all involved.
The idea below
“One possibility would be to go to more of a regulated natural gas system, where the amount drilled each month is set by a central authority, and prices are set based on a fair rate of return. ”
is such a non-starter that it’s almost laughable. The large players in the natural gas industry (both consumers and producers) would find such a proposal both absurd and disturbing. This idea was tried, and it failed misreably. Ordinary consumers in the US are far, far better now than they were in the Stalin-Mao-esque shortages of the 70s, when central authorities tried to manage things.
You really should have studied natural gas futures contracts and pricing a bit better before posting this Gail. This sort of thing makes you look very naive. I’m not asking you to be an Ayn Rand libertarian, but the current system is working very well, and the “central-command” system in the 70s that it replaced was an unmitigated disaster. To suggest a return to the 70s because 0.01% of natural gas consumption was black-outed in 2011 is somewhere between clueless and crazy.
(Sorry to be harsh, but this post is really beneath you).
I don’t know where you got the idea that I said (or implied) long term contracts don’t exist. I talked about hedging, and I see this as part of the problem. Producers can avoid taking price signals seriously, because they have hedged the price. But that doesn’t get rid of the basic supply and demand problem. And it doesn’t make prices high enough. Twice the current price is still far too low a price.
Your comment is beneath you. Get over yourself!
“Our pricing system is based on short-term supply and demand”
This is completely disigenious. It implies the long term contracts don’t exist, and producers and suppliers need to scramble and jump around in order to match supply and demand.
What is the problem with the current system, exactly? Consumers are enjoying cheap prices. Outages are incredibly rare. Both producers and consumers have price stability via long term contracts. Indeed – retail consumers of gasoline and diesel look to the stability of their natural gas based heating and electrical bills with longing.
You’re worried some suppliers might go bankrupt? So what? This is hardly destroy the economy by itself, and likely put some gas leases in the hands of larger players like Chevron and BP. That supply and demand will fail to match and shortages will occur. That is simply not happening in the US (or is happening incredibly rarely).
You clearly imply that there is some sort of **national problem** here that needs to be solved, without specifying exactly what this problem is. The current system is working beautifully for all parties. If anything, the system whereby oil based products are delivered to consumers should be modified so that consumers can enjoy the price stability they enjoy with natural gas and electricity.
At any rate, you don’t have to take my word that this “more regulated natural gas system” notion is absurd. It’s not even remotely part of the national dialogue re: natural gas.
Someone has to think outside the standard dialog “box”. We have had way too much group-think in economics.
Good for you Gail! Mr hiding-behind-initials should get his own blog since he’s so well informed, but it’s easier to just rip apart the work of someone else.
Living in Pennsylvania leads to much discussion of ng, some of it even intelligible, but little of it good public policy. Obviously, we are seeing LNG export plants being licensed and opened where just 5 years ago there were going to be import facilities. Ugi is tring to get a new $1b pipeline approved from upstate pa into Baltimore to export. The export model seems very short sighted.
I would argue that good public policy would be about job creation around energy import displacement and vertical integration of that energy into products also imported. The first would be petroleum to ng conversion of vehicles. The second could be everything from fertilizer, to plastics to metals.
This is a great article, and you do make the point that Texas 2011 and England 2010 was dicey due to the needs for using gas for both heating and electricity. I wonder how much the storage capacity of cars (not trucking), of cng would minimalize this effect in transport. It is actually the instantaneous availability that was the problem with insufficient and centralized storage of ng ( plus supposed pipeline problems) in England that lead to the conflict. Distributed storage might ameliorate the situation. Consider the normal pre snow storm rush in pa to buy milk and bread, topping off my cng auto tank might be added to this prior to cold snap. One might even imagine an enlightened supplier decreasing its price prior to load balance (I am dreaming here).
I would agree with you–the current laissez faire policy that leads to exporting the natural gas we extract doesn’t really make sense. If the price stays low, it seems like export will be mostly what happens.
I am not convinced that the storage capacity in cars and trucks would make a difference, because owners of the cars and trucks mostly wouldn’t be planning ahead. The usual situation with natural gas shortages is that residential usage gets first priority, because turning off all of the pilot in houses would mean that gas company employees would have to relight them all. I expect commercial uses, including refueling of vehicles, would be cut off early, if there were a chance that it would leave residential users short.
It is my impression that natural gas outages are fairly common. I know Dave Summers (Heading Out) wrote about one that occurred in Massachusetts on a cold day, because electricity (used for heating) and direct natural gas usage were both competing for what gas came through the pipeline, and there wasn’t enough to go around. The problem was solved by closing schools for a day (and maybe some other uses). Britain had a problem last year, and ended up taking commercial and industrial usage offline several different days, if I remember correctly. I read recently about a shortage in Wisconsin, several years ago. I haven’t researched the situation enough to know if someone keeps records of these things.
Natural gas is very bulky to store. In this country, it is usually stored in natural underground formations. These are not necessarily near where storage is needed. Building storage tanks would be expensive, relative to the cost of the material stored. (This is why storing oil works much better.) I know that Iran and some other countries use natural gas vehicles, but I don’t know how they deal with these issues. It may be that they do not have the huge variability in use issue because of cold weather that we in the US have.
Reblogged this on jaufrancproat.
arg.. I wrote a (somewhat) long comment, but the system asked me to login and my comment is gone…
Sorry about that! I once lost pretty much a whole (short) post, because of long-in issues. WordPress now warns authors with a sign across the top–“Not logged in. Log in on another screen, before you proceed.” It is too bad WordPress doesn’t do that for commenters as well.
I’ll give it another (shorter) try:
Thanks the article, I like to read long term views.
My brother who works for a gas company in France told me that shale gas quality may not be suitable for all industrial uses, so that may be another reason why the industrial use share has declined.
I’ve read the US is building LNG terminals to export natural gas, this will surely help bring the international and American natural gas prices closer.
I’m not sure about your proposal for government regulations. I find those to be often ill-conceived and with unintended consequences, even though (most of the time), they aim to do good. I prefer the solution where the US starts to export natural gas, the price would then probably increase and further storage capacities may be build since the price outlook would be better for producers. Of course, if governments had a long term view, they would just try to keep as much natural resources as much as they can in the country (and in the ground), but this would also have nasty short term consequences.
I hadn’t heard about shale gas not being suitable for all industrial uses. I would be interested in learning more.
I am not sure about government regulation either. Government employees often lack the background to understand the real situation. They work for politicians, who have an agenda (getting re-elected). In addition, the structure of the industry now does not lend it self to regulation. It is broken up into too many theoretically competing pieces, at this point in time. A person really needs a vertically integrated system with rational decision makers–either benevolent insiders, or external to the system, with the needs of the people (and the climate) in mind. By the way, in the post I did say, “I am doubtful that such a method of regulation would be feasible or would be politically acceptable, however,” and later mentioned some reasons why I didn’t think it really would work.
There is virtually nothing on the web about this, so maybe it’s not that big of an issue. I’ve only found this quote in a forum (http://www.militaryphotos.net/forums/archive/index.php/t-177479.html):
“Calorific value of shale gas is 2-2.5 times lower that natural gas. Shale gas have no more than 3600 kcal/kg, natural gas – 8000 kcal/kg. Mining/production cost of shale gas more than $200 for 1000m3 by assessment of independent researchers. Moreover, if end consumers will be using shale gas, they need to receive it. And get 2-2.5 times more gas (in volume). So they will need second(?) gas transporting system, different burners and so on. Shale gas cannot be used by heat stations, metallurgical works, etc, because its formula is different, too many bad additions.”
If I remember correctly, my brother told me they could use shale gas for residential use, but they would have to use a different transportation system (apparently already in place) to distribute higher quality natgas for industrial use.
PS: I’ve also found another article http://www.pipelineandgasjournal.com/shale-gas-measurement-and-associated-issues?page=show see section Shale Gas Compositions. They do not discuss industrial usage, but impurities in the shale gas which apparently can be just be processed to make it transportable and usable. The HHV between natgas and gas shale are quite similar, and not 2-2.5 times lower for shale gas according to the table.
The second article you link to is very interesting. It talks about how shale gas has more variability in several different areas than the standard. Some of this is desirable (more “liquids” or heavier modules) and some of it is not. I would expect that the part that is not desirable is likely to lead to higher processing costs for shale gas not meeting standards. In some cases, there may be corrosion issues as well.
I wonder if the situation in your first link applied to a particular source of shale gas, and that that shale gas was not processed to remove the extraneous gas that would not burn.
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