Why US natural gas prices are so low – Are changes needed?

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.

67 thoughts on “Why US natural gas prices are so low – Are changes needed?

  1. Pingback: Why US natural gas prices are so low – Are changes needed? | Economy and Investments | Scoop.it

    • 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.

  2. 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.

  3. 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.

      • 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.

  4. 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.)

  5. 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’.
          .
          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.

          Click to access 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.

  6. 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.

  7. 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.
        .
        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.

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