We are often reminded that energy prices are subject to volatility, and that this volatility can cause, or be caused by, shifts in the economy. What is discussed less often is that “energy prices” are not one, monolithic entity. While it is true that there are times where just about all energy commodity prices spike or drop – think the run up to the financial crisis in 2008 – it is also true that different fuels sources are subject to different supply and demand factors. There are times where one energy source will be much more expensive than another. Currently, oil prices are high relative to natural gas prices (http://www.bloomberg.com/markets/commodities/energyprices.html) , and there is speculation that this is causing natural gas exploration and production companies to shift their focus oil. What does this mean to us?
First let’s look at some of the companies who are making the switch. In a recent blog post for the The Motley Fool, Toby Shute notes that EOG, SandRidge Energy, Chesapeake Energy, and Talisman Energy are all dumping gas plays and picking up oil properties. (http://www.fool.com/investing/general/2010/04/09/everyone-hates-natural-gas.aspx) Most of these companies explain their actions by saying that they simply want to diversify their production mix, which is possible. It also might be the market simply doing its job – industrial demand for natural gas is down, shale gas plays are cheap, so it makes sense that these companies are going after the more valuable commodity. But, as usual, that is the story without regard to carbon content… when we take that into account, how do our views change? Might we want to incent the market not to abandon natural gas in favor of oil?
This is a familiar chart by now, but just in case someone has missed it, let’s look one more time the difference in carbon content between oil and natural gas.
Now, you might argue that natural gas is primarily used for electricity production and oil for transportation. On the other hand you can also argue that Natural Gas is the obvious “bridge fuel” because using it does not require the infrastructure overhaul that most clean technology does. If properly incented, by either the market or policy, we could use natural gas in traditional oil strongholds like transportation. (http://www.consumerenergycenter.org/transportation/afvs/cng.html)
So what are we doing from a policy standpoint to incent natural gas use? At this point, very little. When campaigning in 2009, Obama’s energy plan never differentiates between natural gas and oil. (http://www.barackobama.com/pdf/factsheet_energy_speech_080308.pdf) The white house webpage on Energy & the Environment makes no mention of natural gas. (http://www.whitehouse.gov/issues/energy-and-environment)
There is no question that natural gas is a cleaner burning fossil fuel. There certainly can be debate over whether using a cleaner but non-renewable fuel is the right thing to do. Unfortunately, that debate does not seem to be taking place, and the Natural Gas companies are taking notice… and maybe turning into oil companies because of it.