4 Reasons Natural Gas Is So Cheap

By Tim Parker | May 10, 2012 AAA

Natural gas prices have been low this year. You can't complain about that. Recently, natural gas broke the psychological $2 mark which may beg the question of how much lower natural gas will go. It has since gone north of $2 but that doesn't change much of anything. Natural gas is still relatively cheap. According to the United States Energy Information Administration, in June 2008, natural gas hit a high of $12.41 per thousand cubic feet. In just four years, natural gas has declined almost 80% and according to energy analysts, there is nothing stopping it from going lower. Here are four reasons why.

SEE: A Natural Gas Primer


1. The Markets Are Local
If you've spent any time being outraged at the price of gasoline, you've probably read up on the oil market. You know that it is a true global market. Any country with oil can hire a tanker to take it anywhere in the world. Although there are various oil markets, they react in tandem to global events keeping oil prices around the world close, compared to natural gas.

The natural gas market is different. Because the most efficient way to transport natural gas is on land, through pipelines, natural gas from American wells don't go overseas. This is why natural gas in Britain is rising while in the U.S. it is falling.

2. Mild Winters
Winter is supposed to be cold, and this year it didn't work out the way it normally does. In fact, for many areas of the country, it's supposed to be very cold and the way to keep homes warm is with a gas powered furnace. In 2011, that didn't happen. It was an unseasonably warm winter that left natural gas suppliers with too much supply.

There's so much left over supply that all of the salt mines, depleted oil fields and aquifers that hold the extra supply could be full as early as the fall, if production isn't drastically cut. Basic economics dictates that too much supply and too little demand results in lower prices.

SEE: Introduction To Weather Derivatives

3. Fracking
Fracking isn't new technology but in recent years, it has become more cost effective. For years, drillers knew that gas and oil were trapped in shale rock all over North America, but getting it out of the ground in a cost effective way was a challenge. That all changed with new technology and because of that, areas of the country that were once not viable drilling sites are now seeing activity resembling the historic gold rush.

However, fracking has greatly increased supply. More wells means more gas coming to the market and that, along with the mild winter, has created the perfect storm for gas prices. Consumers are happy but investors and energy companies are not.

SEE: How Shale Fracking May Hurt Your Investment

4. Lack of Consumer Demand
Currently, 31% of all natural gas consumption comes from power plants that use it to create electricity. Another 28% is used for other industrial purposes but only 19% is used by consumers.

In the near future, that may change. As natural gas powered cars and the infrastructure to fuel those vehicles becomes more common, consumer demand for natural gas will increase. This will also help to address the supply glut that will likely continue to be an issue as more wells are drilled.

The Bottom Line
Some energy analysts believe that natural gas will be significantly higher by the end of 2012, but others are more skeptical. With large scale demand years away and drillers showing no sign of a large scale decrease in production, natural gas prices may stay consumer friendly for much longer than 2012.

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