[Originally published on Apr 25, 2014.]
Movies, books and numerous articles are being published about the dangers of fracking - the process through which natural gas is extracted from shale rocks. According to the U.S. Energy Information Administration the United States is said to have 2.5 trillion cubic feet of natural gas reserves and technically recoverable gas - which can be extracted using fracking. If speculation is based on supply and demand, the question then remains - why has the price of natural gas more than doubled? A number of variables play into this: international policy on imports - which are down 14.61% from Canada, and Liquefied Natural Gas imports which are down 43.51% year over year respectively, have diluted reserves to an all-time low of 825 billion cubic feet in the U.S. Low natural gas reserves as well as the number of natural gas rigs, close to 1600 in 2008 to a little less than 400 today, have allowed the price to rise as speculation surrounding natural gas and constrictions on fracking, are making this valuable resource harder to obtain. However, all is not over with natural gas or fracking. A new technology has made fracking less environmentally damaging, a gel like substance, which does not require vast amounts of water and unlike water leaves unwanted chemicals in the ground, has emerged in Canada, and is now making its way to the U.S.
The extracted natural gas called liquefied petroleum gas seems to be the new contender in the energy market. In the next four years the market for LPG will grow at 4% annually and due to the abundance of natural gas in the U.S. and smaller impact on the environment during extraction, it will continue to drive the cost of natural gas down. How does this impact a speculator in the energy commodities market? Speculators will look to put their money elsewhere.
Agricultural commodities look like a promising investment, and as energy speculators realize that technological improvements and abundant natural resources in the U.S. make for less cherished investments for commodities in the energy sector - the money will flow into other sectors. A booming global population, man-made climate change, a rise in sea levels and acidity of oceans have set the world up for unprecedented droughts and floods. The U.N. Intergovernmental Panel on Climate Change has warned that any threats to food supplies have already led to civil conflict in less developed countries and as such well-developed nations are at risk now. With food consumption continuing to exceed production, countries are running some of the lowest food reserves in history.
Food supplies have adverse effects on the well-being of the economy, a rise in prices for food decreases overall discretionary income and thus impacts the economy as the demand for other non-essential goods dissipates. Prices of key agricultural commodities have a direct correlation to droughts, floods and reserves. The stability of the U.S. economy is thus dependent on stability in the commodities markets, either through speculation, climate change or growth in the global population - sooner or later, unless reserves are increased, any disruption in food costs could lead to another recession.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.