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By James Hamilton on Jun 12, 2012 with 2 responses

Why Using Natural Gas Can Be a Positive Story for the U.S. Economy

The figure below plots the price of crude oil in dollars per barrel and the price of natural gas on an equivalent BTU basis. Historically, the two prices had tended to stay fairly close together. But they began to diverge significantly in 2006. Even with the recent easing in oil prices, today you’d have to pay over $14 to get a million BTU in the form of crude oil, but only $2.30 if you were willing to use natural gas as an alternative.

Black line: price of crude oil (West Texas Intermediate, dollars per barrel, end of month values, from FRED). Green line: 5.8 times price of natural gas (Henry Hub Gulf Coast spot, dollars per million BTU, end of month values, from EIA).

That’s a lot of incentive to try to use natural gas for more of what we do with oil. And people are responding to those incentives. For example, Westport Innovations Inc. issued the following press release last week:

Westport Innovations Inc. (WPRT), a global leader in natural gas engines, has signed agreements with Caterpillar Inc. (CAT) to co-develop natural gas technology for off-road equipment, including mining trucks and locomotives. Caterpillar and Westport will combine technologies and expertise, including Westport (TM) High Pressure Direct Injection (HPDI) technology and Caterpillar’s industry leading off-road engine and machine product technology, to develop the natural gas fuel system. Caterpillar will fund the development program….

While the agreements initially focus on engines used in mining trucks and locomotives, the companies will also develop natural gas technology for Caterpillar’s off-road engines, which are used in a variety of electric power, industrial, machine, marine and petroleum applications worldwide….

Development programs will start immediately for both new and existing engines, combustion technology and fuel systems. Commercial production is expected to begin in about five years.

Producing and finding ways to use natural gas may be the most promising answer to the question I posed last year of what could America be good at? Consider also this report last week from Business Week:

Exxon Mobil Corp. (XOM) … plans to build factories that produce ethylene and plastics in Texas, joining a growing group of competitors racing to use U.S. natural gas to make chemicals.

A new plant at the company’s site in Baytown would produce 1.5 million metric tons of ethylene annually starting in 2016, pending regulatory approvals…

The Houston-area plants would “significantly” increase exports of plastics, Exxon said in the statement. Chevron Phillips Chemical Co. is planning a $5 billion ethylene project at its Baytown site and Dow Chemical Co. (DOW) is also expanding to use more gas-based raw materials that provide a cost advantage over oil-based production in Europe and Asia.

And if America can’t figure out how to use our natural gas, other countries can. Two weeks earlier, Reuters carried this story:

Energy companies announced two multibillion-dollar North American liquefied natural gas export plants on [May 15], adding to a lengthening list of projects aimed at shipping surplus gas overseas to take advantage of more lucrative markets.

Excelerate Energy, the U.S. liquefied natural gas company founded by Oklahoma billionaire George Kaiser, plans to develop the country’s first floating LNG export plant off the Gulf Coast, while Royal Dutch Shell (RDSA) has partnered with Asian buyers to build a plant in western Canada.

Though once again there’s a key U.S. sector that seems to be slower to recognize the new opportunities:

Despite the strong case to allow natural gas exports, the U.S. government is proceeding cautiously with the issue. The topic is seen as being politically sensitive and no decision is expected before the November elections.

This article originally appeared on Econbrowser.

  1. By notKit P on June 12, 2012 at 4:38 pm

    When I read something that is so obviously wrong, I try to figure out why. It could be that I do not understand the subject in which case it would be a learning opportunity for me.

     

    The mistake that Professor Hamilton makes is comparing the per BTU cost for oil or natural gas entering the system and not the end use costs.

     

    For example, the cost of power into my grid is 3-5 times what I pay for it at the retail level. On a per BTU cost, electricity to run my heat pump is very expensive yet on a hot summer day I know of no one is using natural gas to cool their homes. On the other hand, when all you need is heat, NG hot water heaters and furnaces are very economical.

     

    Two key points here. First is that it depends on what you are doing with energy. Second, hydrocarbons are also feed stocks for making other things.

     

    When it comes to NG for energy, NG has almost never trended close on a delivered BTU basis to the cost of oil. If an oil fired power plant is producing power it is because the NG plants are already at full capacity.

     

    I sure an econ professor has heard and maybe said ‘its the economy stupid’. California econ professors may not know this but it is also the weather. NG is cheap right now because of the economy and extremely mild winter. A robust economy and hot summers and cold winters will double and triple the delivered cost of NG.

     

    Then there is NG as a feedstock. Being old school, I think we should use coal and nukes to make base load electricity and use NG to make ammonia and plastics. NG is very good for heating homes in cold climates and producing power in high demand months. Keeping jobs in in the US and having low heating bills is good for Americans. Not a new concept.

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  2. By Natural Gas Companies in PA on June 21, 2012 at 9:05 am

    It’s also important to think of natural gas in terms of jobs – people building fueling stations, etc. We’ll have to watch and see whether this comes up in political debates in the fall.

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