7 Reasons Why Natural Gas is Great for America

by JT McGee

Just call me T. Boone Pickens.

Natural gas looks like the best thing to happen to this country in a long time. And maybe I’m overly optimistic, but here’s why I think natural gas can really put the United States back on track when it comes to real, long-run economic growth.

7 Reasons Natural Gas Rocks

  1. Supply-Side Boom – Most energy booms happen from rising prices, whereas this latest natural gas boom is different. The race for natural gas has nothing to do with high natural gas prices, and everything to do with falling exploration and recovery prices. Fracking makes it far less expensive to bring natural gas to the surface. Production volume is up 24% since 2006, while consumption has increased at only half that pace.
  2. Usefulness – Natural gas is easily and cheaply converted into electricity. Electricity is the common denominator when it comes to usable energy, as it can be used to power pretty much anything. Electricity prices will drop dramatically as more electricity derived from natural gas hits the grid.
  3. Exports – We import tons of oil, but we’ll soon export tons of natural gas. As new liquefied natural gas plants are built, the United States stands to export billions of cubic feet of natural gas to areas where the cost of production is higher. International distribution channels for natural gas are virtually nonexistent at the present time. However, liquefied natural gas will allow for hedging the difference between natural gas prices in the United States ($2 per MCF) and prices in Asia and Europe ($16 in Asia, and $9 in Europe.)
  4. Energy as a value-add – So long as the United States remains the low-cost producer of natural gas – which is highly-likely – energy will be cheaper in the United States than elsewhere around the world. The United States has never been a place to open an energy-intensive business such as a manufacturing center, but rising wages in the emerging markets coupled with inexpensive capital in the United States could very easily bring manufacturing back home. Energy is the basis of almost any tangible industry, and low prices give a very competitive edge. I’ve published previous articles about manufacturing in the US.
  5. Unskilled labor boom – College-educated workers find a job market that is still very much in their favor. Those without a specialization have very few places to turn, however. Natural gas fields provide incredible salaries for a career that is apprenticeship-driven. That’s good news for people who are willing to work hard for good pay – and the pay is very good. Here’s a list of entry-level pay for various natural gas-related jobs.
  6. natural gas salaries, entry level natural gas salaries, natural gas jobs

  7. Political benefit – Energy independence is mostly a talking point in DC, but that does not mean energy independence has no real strategic value. Becoming a major player in energy puts the United States in an even better position on the world stage – which is great! Maybe we’ll stop fighting wars over oil!
  8. Oil alternative – The biggest driver for oil is transportation, particularly personal transportation from small automobiles. Already, some municipalities (including my own) use natural gas to fuel buses and garbage trucks. The limited range of a city or school bus or garbage truck means that a municipality can make the switch to natural gas powered cars and trucks without a large capital investment. Shifting demand from oil to natural gas will invariably bring down the cost of driving a gasoline-powered car.

How to Play the Gas Boom

Any supply-side event is difficult to play. Realize that the boom in natural gas is not due to higher prices or greater demand (yet) but from a low cost of production. Natural gas producers are getting clobbered as supplies rise faster than the rate of change in consumption habits. I think natural gas producers are a pretty poor way to play natural gas in the long-run.

The best play is indirect – relish in the reality that the cost to drive your car may drop considerably in the next ten years. The cost to move products from A to B will fall too, driving lower prices. Any physical good sold in any store has built-in transport costs. Lower transportation costs are good for any consumer. Lower cost of transport is one of the reasons online retail has a competitive edge.

The spread between oil and natural gas prices has never been so great:

natural gas to oil, natural gas to WTI crude oil

This is one of those events that lifts everyone. Lower energy costs plus employment growth in natural gas technologies is good for the domestic economy, good for employment, and especially good for unskilled, uneducated workers who want a shot at a high-paying career relative to the financial investment. What’s good for everyone is…well, good for everyone. One study suggests natural gas may create some 900,000 jobs, adding $1,000 to every American’s budget.

Long-run opportunity

Natural gas is still an American opportunity for the long-run. New liquefied natural gas plants will need approval, and it will take many years for infrastructure to settle around a new, natural gas-powered world. It’s highly-unlikely we, as individuals, will drive natural gas powered cars any time soon, but municipalities and taxi fleets can make the switch easily. That’s good for driving down demand for the fuel we use to power our own cars.

We’re in a shake-out period. Producers need to find an appropriate level of production, and source new demand for natural gas production. However, the truth is that natural gas is really the cheapest energy source we have at our disposal. It just takes time for realizations to align with reality.

{ 5 comments… read them below or add one }

Value Indexer April 25, 2012 at 09:27

Cheap energy is almost certainly good news for many industries. Just goes to show (again) that what has under-performed for the last 10, 20, or 30 years might be good again! I wonder how the availability of natural gas compares to the first drilling for oil in north america?

Reply

JT McGee April 25, 2012 at 10:00

They say there’s something like a 1-2,000 trillion (quadrillion?!) cubic feet of natural gas in this country. Something like 5,800 cu ft. of natural gas has the same energy content as 1 barrel of oil. I don’t know enough about energy production or the physics, chemistry and general practicality of it to know if a BTU of oil is always equivalent to a BTU of natural gas but I do know enough finance to know that the BTU equivalent of 170-340 billion barrels of oil is a ton of cash.

Obviously it’s not all profitable to bring up, and estimated reserves are…well, estimated reserves, but the point is that we have a TON of energy hanging out below the surface of the United States in the form of natural gas. Might as well make use of every last cubic foot of it – especially since the economics have shifted quickly to favor nat gas.

Reply

101 Centavos April 25, 2012 at 21:20

JT, I’m not as bullish on the LNG plants. Something on the scale of the Kitimac project in BC take *forever* to get permitted in the US. Business for cogen plants, on the other hand, seems to be on fire.

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JT McGee April 26, 2012 at 09:49

Hey – you’re the commodities guy!

I have read repeatedly that large-scale LNG projects take forever to get approved. Why is this? At any rate, there has to be some kind of substitution effect. If LNG approval plans sit around collecting dust, at least the long-haul allows us to displace say…coal, and export our coal instead.

Curious as to what you think natural gas prices will look like in the next 2-3 years. Is $2 here to stay?

Reply

101 Centavos April 27, 2012 at 12:13

Sure, at least for a while, until all those additional LNG vehicles start having an impact.

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