If one believes in the unending bounty that shale gas can deliver, the news keeps getting better. Taking the Pickens Plan to a new level, CNBC envisions a smooth transition to nat gas vehicles that will finally end the long rein of oil as the sole transportation fuel. If you are concerned that low nat gas prices will eventually force debt laden production companies to cut back on drilling, Citi (NYSE:C) guru Ed Morse alleviates anxiety by suggesting that the government could simply cap prices. Taking the problematic and volatile issues of supply and demand out of the equation and allowing the government to control prices has not worked too well in Argentina or other countries but maybe in the land of the free (except markets), price controls may work and have the population soon motoring in LNG vehicles. In regard to price, Exxon (NYSE:XOM) CEO Rex Tillerson admitted that his company was "losing its shirt" on natural gas because of low prices and high production costs. At what price would Tillerson and the leader of other major energy companies be allowed to keep their shirts for providing the gas that will lead the US to the promised land of energy independence?
The problematic question of cost is the focus of a few skeptics including David Hughes, Art Berman, and others who note the rapid decline of shale gas drilling, high costs and water usage, environmental questions, and terrible economics of producing at a loss. But if you wondering how much longer companies can continue to feverishly produce at a loss, Ed Morse provides the soothing answer of government controlled pricing.
Jeremy Grantham, a supporter of free markets, sees higher long term prices. However, a small investor who buys options on natural gas could quickly be whipsawed in the volatile market. Instead, if one takes the Jim Rogers approach of betting on the commodity instead of the companies, an ETF such as NAGS that allows for dollar cost averaging, is a safer option. A broad based ETF of production companies such as the Guggenheim Canadian Energy Income ETF (NYSEARCA:ENY) also reduces risk. In holding only Canadian gas and oil companies, ENY has the added benefit of reduced geopolitical risk, a vital point given the 2012 terrorist attack in Algeria. Moreover, ENY currently pays a dividend of 2.39%. Finally, a small producer such as Birchcliff Energy (OTCPK:BIREF) is more volatile but is a potential take-over target because of its vast land holdings and mixture of both oil and gas production in Canada.
Of course, if prices are capped to allow for the transition to nat gas vehicles as well as guarantee low costs for US manufacturing and chemical companies, holding stock of any producer wouldn't make sense. Before such a drastic step as capping nat gas prices is made, the US might take a cautioning look at the impact of Saudi Arabia's subsidized gasoline prices. While the Saudis keep the population happy by sharing their oil bounty through major price reductions, the main downside has been that increased domestic usage (Jeffrey Brown, Export Land Model) has crimped exports. Capping nat gas prices in the US might have a similar outcome but that's a small price to pay for scuttling the laws of supply and demand and ensuring happy low priced motoring, free from OPEC's control, for decades to come. In the new age of QE, manipulation and control of markets has become accepted as a means of reducing short term pain even if the long term impact is dangerously unknown.