Natural Gas: A Quick Look at the Biggest Mover in the American Energy World
Natural gas production is taking off in the United States. Historically, its growth has been limited by two factors: cheap oil, and the cost of its extraction.
However, investment in natural gas has recently taken off because both of those factors have been addressed: oil is increasingly expensive, and fracking technology has matured.
A note on the “oil is increasingly expensive” statement: the trend is not steady, but this post draws its data from the EIA report, which foresees a climb in all cases.
This graph shows the EIA projections, which are based in large part on the expectation that at least 40% of the world’s increasing demand for oil will be supplied by OPEC, and that OPEC will artificially limit that supply to drive price (they are doing this currently, in a deal enacted after this report was published). The “Reference” line on the graph represents the EIA’s highest-probability modeled outcome.
Here is a graph of the impact of technology on oil & gas from the Energy Information Administration (EIA):
Natural Gas Production Rates
The graph above shows natural gas production rates under three assumptions:
- There is great progress in extraction technology, and a lot of oil & gas to be extracted (yellow line)
- There is little technology available and/or the reserves run low (brown line)
- Somewhere in the middle– the most likely case (blue line)
As you can see, the growth of natural gas is entirely dependent on continuously improving technology. If we don’t keep improving on technology for extraction, the production stays steady instead of increasing.
According to the EIA report, the bigger the gap between the price of oil and the price of natural gas, the more natural gas we’ll produce domestically. Economic viability drives investment in extraction technology.
Prices of Oil and Natural Gas
Here’s a picture of the projected prices of oil and natural gas up to 2040:
The price gap between natural gas and oil is big, and it’s growing. The growth is driven not by a change in the price of natural gas, but entirely by the price of oil (which is expected to go up largely due to increasingly expensive extraction techniques) while natural gas prices stay steady.
Have these predictions been accurate so far? Natural gas is taking off even faster than the EIA predicted. There are about 5.8 million BTUs in a barrel of oil. That means that since oil (Brent Crude) is about $55/barrel today, we’re at $9.48/million BTUs in January 2017– a year or two ahead of schedule by the EIA AEO2016 graph.
The Steady Price of Natural Gas
The predicted steady price of natural gas is an interesting aside. I mentioned that the bigger the price gap, the more natural gas we’ll produce. But shouldn’t increasing supply of natural gas drive down its sale price and eventually make it economically unviable?
As the cost of natural gas declines, the more domestic demand we’ll create for it as a fuel and as a feedstock.
Natural gas, used as fuel for electricity generation will increase– at a price that will drive some coal plants to close. But fuel is not the only use of natural gas.
According to AEO2016, petroleum companies are expected to take advantage of low natural gas prices and build new plants which use natural gas as a feedstock for petrochemicals (e.g. the basis of plastic). This will increase the country’s export of bulk chemicals.
All that serves to increase both the supply and demand of natural gas– thus keeping the price steady while we greatly increase fracking in the United States.
Environmental Controversy around Natural Gas
The process of extracting natural gas is environmentally destructive. And, like other fossil fuels, burning it causes greenhouse gas emissions. Compared to coal, burning natural gas for power emits less CO2 per watt, but more methane per watt.
It is indisputable that natural gas is bad for the environment. But some argue that it has value as a “transition fuel”. Natural gas is so economically viable to extract & burn for power that its rise is currently causing the shutdown of coal mines and coal plants. This transitions us from a highly CO2-emissive power source to a highly methane-emissive power source.
Methane gas is a more powerful greenhouse gas than CO2, but its effects are much shorter-lived, precipitating out of the atmosphere in a decade rather than hundreds of years.
Detractors assert that we can’t afford to increase our methane emissions, because even a decades-long timescale for the high warming effects is too long for our current climate. Proponents point out that continuing to accumulate CO2 impacts us for centuries rather than decades.
Concluding Thoughts on Natural Gas
We have no other options coming on the timescales we need to transition off of coal. But “transition fuel” arguments don’t point plausibly to the energy source that comes after natural gas. What are we transitioning to?
Ideally, we’d have strong investment in solar/wind, but production capacity will take some time to ramp up– and it would have to be a huge investment. Meanwhile, while solar/wind are economically positive, they’re nowhere near as economically attractive as natural gas.
Because economics currently has a much larger impact on decision-making than environmental effects, it’s safe to assume that natural gas production will increase as predicted over the next 30 years, assuming steady investment in technology continues to produce steady returns.
Is there a silver lining? The higher rates of methane accumulation will drive the effects of global warming to come faster. Maybe that’s what it takes to sway international politics to accept climate science and adopt strict emissions regulations. As far as silver linings go, that’s pretty grim.
If this type of information is interesting to you, or if you’d like to dig deeper into my sources, I strongly recommend you read the EIA’s Annual Energy Outlook report. I have an annotated copy of it here.
The Energy Information Administration has a strong commitment to open data; you can find their API documentation here.
