New Era Of Energy Abundance: Nat Gas Production Set A Record Last Year, Bringing Inflation-Adjusted Prices To A 17-Year Low

Includes: UNG
by: Mark J. Perry

(Click to enlarge)

The Energy Information Administration released updated data today on natural gas production and prices through the end of 2012. The chart above displays annual data from 1995 to 2012 for: a) total U.S. natural gas production (gross withdrawals, see red line) and b) the inflation-adjusted wellhead price of natural gas in 2012 dollars (blue bars). Here are some highlights:

1. The U.S. produced almost 30 trillion cubic feet of natural gas last year (gross withdrawals or “wet gas” including methane, ethane, propane, and butane), setting a new record for annual production. Natural gas production increased by 4.5% in 2012, following a 6.2% increase last year. Over the last decade, natural gas production has increased by 24%. Although not displayed in the chart, the production of consumer-grade dry natural gas (almost pure methane) in the U.S. also reached a record high last year of 24 trillion cubic feet.

2. As a result of the record production levels in 2012, the average price of natural gas fell last year to $2.66 per 1,000 cubic feet. Adjusted for inflation in 2012 dollars, that was the lowest, average annual price since 1995.

3. In the decade from 1995 to 2005, production of natural gas in the U.S. was basically flat, and then actually fell towards the end of that 10-year period, so that domestic gas production in 2005 was actually below output in 1995. Also, imports of natural gas surged during that decade, increasing by 53% between 1995 and 2005, since the U.S. had to rely heavily on imported natural gas to meet domestic demand. With flat domestic production, and rising industrial and consumer demand for natural gas, the inflation-adjusted wellhead price almost quadrupled from $2.33 per 1,000 cubic feet in 1995 to $8.62 in 2005.

4. Starting around 2008, hydraulic fracturing and horizontal drilling started to revolutionize the production of natural gas when previously inaccessible oceans of gas trapped inside shale rock miles below the ground started being unleashed with the breakthrough extraction technologies. Accessing shale gas in the U.S. proved to be a real game-changer, and the chart above helps to tell the story. As production surged to new record levels in each of the last six years, the inflation-adjusted price of natural gas has fallen, and is now at a 17-year low. Compared to the most recent peak of $8.50 in 2008, gas prices have fallen by 69%.

Bottom Line: The shale gas revolution in America has totally transformed our energy landscape. The fact that we’re having a national debate now about whether to allow exports of U.S. natural gas to Europe and Japan demonstrates that we have entered a new era of energy abundance and prosperity that would have been unthinkable even five years ago.