Natural Gas: Worth a Look

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The real price (2007 dollars) of natural gas at the Henry Hub averaged $2.70/Mmbtu in the 1990s (1990 through 1999); the ratio of the highest annual price (1996) to the lowest (1991) was 1.67. Seen from the perspective of time, natural gas was not notably volatile in the 1990s. This decade (2000 through 2008) has seen the real price average $6.4/Mmbtu. The high (2008) to low (2003) ratio is 2.4. Both real prices and volatility increased in the first years of this century, as they did for almost all heavily traded commodities.

At present , in nominal terms the HH price is around $3.50/MMbtu. In real terms, HH natural gas prices are at the bottom end of the range for this decade. They are considerably lower than the annual average real price when viewed through the prism of the past 19 years. The chances that natural gas prices will be higher to much higher in the next 10 years, on average, than at present seem pretty good. No one, of course, can credibly predict how volatility will behave. If you think the world is becoming a more unstable place and there will be a flight to safety away from the dollar, then volatility is not going to decrease.

The price relationships between natural gas and electricity continue to diverge. Contrary to what many in the press and general public believe, the real price of retail electricity has declined steadily for the past 30 years. The real retail price, averaged for all US utility footprints this decade (2000 through 2008), has been 8.7 cents/Kwh (2007 dollars). It was 9.0 cents/Kwh in the 1990s and well above 10cents/Kwh in the 1980s. This real decline is a consequence of the US generating mix, which is two-thirds coal and nuclear.

Given these real price series, it is a fairly safe guess that electricity will continue to push natural gas out of final use, especially in residential markets. It is also quite unlikely that natural gas will even maintain its share of generating markets in the next 10 to 15 years.

Disclosure: The author owns stocks in the oil, natural gas and electricity industries.