Natural Gas Prices: America's Energy Jackpot

by: Mark J. Perry

The Department of Energy released its monthly update Tuesday on natural gas production and prices through May, and the chart below displays inflation-adjusted natural gas prices for commercial and industrial users. By end user in May, industrial customers represented about 32% of natural gas consumption and electric power companies used almost half (49%) of the total natural gas consumed. Together, industrial and electric power customers consumed more than 81% of the total natural gas supplied in May. The rest of the natural gas market is split between residential customers (10%) and commercial users (9%), with a small fraction (1/6 of 1%) going for vehicle fuel.

On an inflation-adjusted basis, the prices paid by industrial users for natural gas in May were the lowest since at least January 2000, when the Department of Energy's monthly data series starts (see red line in chart). The prices paid by electric power companies are almost identical to the prices for industrial users, so we can conclude that the users of more than 81% of the natural gas supplied in May (industrial customers and electric utilities) were paying the lowest, inflation-adjusted gas prices in at least a decade, and possibly longer. Prices paid in May ($2.94 per 1,000 cubic feet) were less than half the natural gas prices of two years ago in March 2010 ($6.31), and about one-quarter of the $13.62 price four years ago in July 2008.

Likewise, commercial customers are paying inflation-adjusted natural gas prices that are close to the lowest in recent history, and about half the 2008 price (see blue line in chart).

These significant price declines for industrial, commercial and energy power users provide additional support for the claim that America really "hit the energy jackpot" with the "natural gas windfall," making it "one of the most important developments for the U.S. economy in the last 60 years," according to Martin Neil Baily and Philip Verleger in a recent CNN editorial, here's an excerpt:

Cheap gas may not be enough to offset the drag of a slowing global economy this year, but it will boost long-term investment, help the beleaguered manufacturing sector and increase exports.

Building petrochemical plants could suddenly become attractive in the United States. Manufacturers will "reshore" production to take advantage of low natural gas and electricity prices. Energy costs will be lower for a long time, giving a competitive advantage to companies that invest in America, and also helping American consumers who get hit hard when energy prices spike.

After years of bad economic news, the natural gas windfall is very good news. Let's make the most of it.

The falling natural gas prices also make the predictions in this December 2011 study by PriceWaterhouseCoopers, "Shale gas: A renaissance in U.S. manufacturing?"all the more likely:

  • U.S. manufacturing companies (chemicals, metals and industrial) could employ approximately one million more workers by 2025 because of abundant, low-priced natural gas.

  • Lower feedstock and energy cost could help U.S. manufacturers reduce natural gas expenses by as much as $11.6 billion annually through 2025.

MP: As I have emphasized lately, America's ongoing shale-based energy revolution is one of the real bright spots in an otherwise somewhat gloomy economy, and provides one of the best reasons to be bullish about America's future. The shale revolution is creating thousands of well-paying, shovel-ready jobs in Texas, North Dakota and Ohio, and thousands of indirect jobs in industries that support the shale boom (sand, drilling equipment, transportation, infrastructure, steel pipe, restaurants, etc.). In addition, the abundant shale gas is driving down energy prices for industrial, commercial, residential and electricity-generating users, which frees up billions of dollars that can be spent on other goods and services throughout the economy, providing an energy-based stimulus to the economy.

Cheap natural gas is also translating into cheaper electricity rates, as low-cost natural gas displaces coal. Further, cheap and abundant natural gas is sparking a manufacturing renaissance in energy-intensive industries like chemicals, fertilizers, and steel. And unlike renewable energies like solar and wind, the natural gas boom is happening without any taxpayer-funded grants, subsidies, credits and loans. Finally, we get an environmental bonus of lower CO2 emissions as natural gas replaces coal for electricity generation. Sure seems like a win, win, win, win situation to me.