The price of natural gas in the USA is low. Not all that long ago, natural gas was sold at over five times the current price. There also used to be a pretty stable relationship between the price of oil and that of natural gas. Even with the big drop in oil prices, however, the gas price is still below the level that the old price relationship would have indicated. The reason why natural gas is so inexpensive, of course, is the development of shale gas using horizontal drilling and fracking. The supply has become so large that low prices have been the result. Indeed, we have gotten to the point where some pundits now tell us that the gas glut is over because many American companies have cut back on drilling.
Let's take a step back an examine two important questions: first, is the gas market saturated or will there be additional demand that could require additional supplies; and second, are there any benefits from the gas glut? In many ways, these two questions are closely related. After all, to the extent that there are benefits to having such a large gas supply it will encourage additional uses which could use up existing supplies.
Perhaps the biggest development in the natural gas market is the start of the export of liquefied natural gas known as LNG. Remember, the price of gas is more than three times higher in Europe than it is here in the USA. Even with the costs of transportation added to the production costs for American fuel, the US product can still cost less for the European user. Right now, the expectation is that there will soon be 5 or 6 LNG export facilities under construction. The facilities will result in something like 15% of the current American production being sold overseas. That is a major expansion of demand.
The second big development which comes from the natural gas revolution is the siting of new facilities right here in the USA. There are many industries like chemicals and plastics that make heavy use of natural gas. With American prices for the gas being set at less than 35% of the cost elsewhere, there is a major reason for new plants and facilities to be built here in the USA. Many of those jobs that moved overseas will come back since the raw material costs will be so low in the USA that they will outweigh the higher labor costs. In addition to this, power plants are switching to natural gas as the fuel of choice. This switch has had a major effect in reducing pollution in America. It should also keep the cost of electric power lower than it would otherwise be. Of course, this will also increase demand for natural gas.
There will be ups and downs in the price of natural gas over the next few years. This is normal. No matter what the short term variations in price are, however, the long term outlook for the American gas industry is extremely bright.
Let's take a step back an examine two important questions: first, is the gas market saturated or will there be additional demand that could require additional supplies; and second, are there any benefits from the gas glut? In many ways, these two questions are closely related. After all, to the extent that there are benefits to having such a large gas supply it will encourage additional uses which could use up existing supplies.
Perhaps the biggest development in the natural gas market is the start of the export of liquefied natural gas known as LNG. Remember, the price of gas is more than three times higher in Europe than it is here in the USA. Even with the costs of transportation added to the production costs for American fuel, the US product can still cost less for the European user. Right now, the expectation is that there will soon be 5 or 6 LNG export facilities under construction. The facilities will result in something like 15% of the current American production being sold overseas. That is a major expansion of demand.
The second big development which comes from the natural gas revolution is the siting of new facilities right here in the USA. There are many industries like chemicals and plastics that make heavy use of natural gas. With American prices for the gas being set at less than 35% of the cost elsewhere, there is a major reason for new plants and facilities to be built here in the USA. Many of those jobs that moved overseas will come back since the raw material costs will be so low in the USA that they will outweigh the higher labor costs. In addition to this, power plants are switching to natural gas as the fuel of choice. This switch has had a major effect in reducing pollution in America. It should also keep the cost of electric power lower than it would otherwise be. Of course, this will also increase demand for natural gas.
There will be ups and downs in the price of natural gas over the next few years. This is normal. No matter what the short term variations in price are, however, the long term outlook for the American gas industry is extremely bright.
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