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Natural gas has become a very cheap and abundant source of energy




Yesterday I stumbled across an interesting article in Salon entitled "Everything you've heard about fossil fuels may be wrong." The thrust of the article was to highlight the huge increases in proven and exploitable reserves of natural gas that have been discovered in recent years thanks to "fracking" technology, and what this means to the search for alternative energy sources and U.S. energy independence.

As everyone who follows news about energy knows by now, in the last decade the technique of hydraulic fracturing or "fracking," long used in the oil industry, has evolved to permit energy companies to access reserves of previously-unrecoverable “shale gas” or unconventional natural gas. According to the U.S. Energy Information Administration, these advances mean there is at least six times as much recoverable natural gas today as there was a decade ago.

So I thought it would be interesting to compare the relative costs of natural gas and crude oil as sources of energy, and produced the chart above. What it shows is that since 2003 the price of natural gas has fallen from the equivalent of about 20 barrels of crude per 10,000 BTUs, to less than 5 today. In other words, natural gas has become 75% cheaper relative to crude oil in the span of just eight years, thanks to huge increases in natural gas supplies. (Natural gas futures traded around $5-6 per million BTUs in 2003 and today trade around $4-5, while crude oil has soared from $30/bbl to $100.)

This indeed has enormous implications for future energy use and industrial development. It isn't often that we see such huge changes in relative prices that have such a huge potential for changing the way our economy works.

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