IB2E Current Events December 2, 2014

By John Macomber

The slides from today’s discussion about current events are here: IBEE Current Events 2014.12.02

The post that underscored the meaning of lower oil prices is here.

By the way, natural gas prices have not dropped along with oil prices (below).  It could be argued that natural gas is a better benchmark for renewable energy since oil is used more in transportation and natural gas more in power generation and home heating.   There are also causal issues having to do with extracting oil or gas from the same fields, and also with the ability to store oil as compared to storing natural gas.

John

Oil vs Nat Gas - Fidelity via Interactive Data Solutions

Oil vs Nat Gas – Fidelity via Interactive Data Solutions

 

 

 

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About macomberjohnd

HBS Finance faculty interested in sustainability in the built environment including devices, structures, townships, and cities.

4 Responses to “IB2E Current Events December 2, 2014”

  1. This is no surprise really. Oil and gas prices have been decoupled for some time. They have different uses, as you pointed out. Demand for gas continues to rise as large infrastructure projects come online (gas powerplants and chemical uses). In addition oil is globally priced while gas is domestic. You are spot on that there are some causal factors too. Part of what drove gas prices down so much a couple years ago was a combination of lease-retention drilling and solution-gas from liquid-rich shales (i.e. Eagle Ford & Bakken).

    As these shale oil plays see reduced drilling activity, gas production from them will have a material impact on domestic gas supply. Gas prices will rise and re-stabilize as rigs move back from oil plays into gas plays (watch for rigs to start moving from Eagle Ford back to the Haynesville, a reversal of what happened when gas prices hit $2). The big unknown with gas is: how cold will this winter be? That seems to be the biggest fluctuating determinant of gas prices due to demand uncertainty.

  2. I wouldn’t consider natural gas to be a benchmark for renewable energy but I think there is a consensus that they are highly correlated. An example of this view used in determining company strategy was when BP restructured its portfolio in 2000. As part of the company’s initiative to move “beyond petroleum” and acknowledge its effect on global warming, BP decided to invest in biofuels, wind, solar, and double down on natural gas weighted assets. This turned out to be a horrible idea when natural gas prices tanked from $14/MMBTU to $3 in 2009. This is also why historically energy majors tend to keep a more balanced portfolio of gas versus oil assets. Like Thomas mentioned above, the producers will shift their activity from oil plays to gas plays when the price of oil is depressed. The producers that have a more balanced portfolio are better able to utilize this strategy to deal with the natural volatility in the prices of commodities.

    Also, another big unknown is the price of natural gas once we start to officially export LNG in 2015. As mentioned before, the price of oil is tied to a global price index but the price of natural gas is tied to the local Henry Hub index. It is unclear what will happen to the prices once we globalize our natural gas. When Australia started exporting LNG, natural gas prices shot up because domestic gas was competing with international gas. The domestic consumers ended up bearing the burden of more expensive gas. However, they were also proportionately exporting a lot more of their domestic gas compared to what the U.S. will be exporting (about 10%). We may also get a lot more price spikes due to increased exportation of LNG and simultaneous increase in demand for natural gas byproducts.

Trackbacks/Pingbacks

  1. Oil prices and gas prices | Innovation in Business, Energy, and Environment - December 26, 2014

    […] agree with Tom (original post and response here) that natural gas and oil prices have been decoupled for some time. Indeed, it is remarkable how […]

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