How to take advantage of Natural Gas Collapse

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ekid
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How to take advantage of Natural Gas Collapse

Post by ekid » Fri Jan 20, 2012 1:00 pm

Who will benefit? I most recently asked about VG utilities fund- a minimum investment of $100,000. Someone suggested VPU, which I bought.

Doubting it has much gas utility...any other ideas?

Random Poster
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Re: How to take advantage of Natural Gas Collapse

Post by Random Poster » Fri Jan 20, 2012 1:09 pm

Buy a few natural gas wells. :D

ekid
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Re: How to take advantage of Natural Gas Collapse

Post by ekid » Fri Jan 20, 2012 1:23 pm

For twenty years i delivered engines for Caterpillar customers. They are big in natural gas engines and will benefit. But I doubt there is anything for ME in that. Those engines will run many, many years without an overhaul on natural gas because of its cleanness. Making it an economical way to generate electricity.

If I were a trader, I would short diesel makers. But I'm looking for an edge, an idea for investment. Yes, I would need to own a well to run some of those engines.

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Re: How to take advantage of Natural Gas Collapse

Post by Grt2bOutdoors » Fri Jan 20, 2012 2:18 pm

ekid wrote:For twenty years i delivered engines for Caterpillar customers. They are big in natural gas engines and will benefit. But I doubt there is anything for ME in that. Those engines will run many, many years without an overhaul on natural gas because of its cleanness. Making it an economical way to generate electricity.

If I were a trader, I would short diesel makers. But I'm looking for an edge, an idea for investment. Yes, I would need to own a well to run some of those engines.
Buy the next best thing, a pure-play natural gas e&p company. They are getting cheaper or more expensive (if you think of them producing gas at above cost prices) by the day.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

ekid
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Re: How to take advantage of Natural Gas Collapse

Post by ekid » Fri Jan 20, 2012 2:28 pm

@ grtoutdoors
You are tongue-in-cheek? Gas exploration and production have shot themselves in the foot with overproduction- many might go out of business I would think...?

Grt2bOutdoors
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Re: How to take advantage of Natural Gas Collapse

Post by Grt2bOutdoors » Fri Jan 20, 2012 2:42 pm

An investor should know never to use a broad brush to paint a picture. It's akin to saying "all bond funds are bad" and we know that isn't the case, only the funds that charge high expense ratios. :beer
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Harley
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Re: How to take advantage of Natural Gas Collapse

Post by Harley » Fri Jan 20, 2012 3:57 pm

There are a few commodity ETFs that invest in natural gas futures:

GAZ
UNL
UNG

Carl53
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Re: How to take advantage of Natural Gas Collapse

Post by Carl53 » Fri Jan 20, 2012 4:25 pm

UNG has lost 95% of value over the last 4-5 years. I suppose you could short it or delve into options. It seems like a sure thing to continue on the way down. But then again the last sure thing, well enough said.

KSActuary
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Re: How to take advantage of Natural Gas Collapse

Post by KSActuary » Fri Jan 20, 2012 4:56 pm

Ag companies that use nat gas to produce their products.

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HardKnocker
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Re: How to take advantage of Natural Gas Collapse

Post by HardKnocker » Fri Jan 20, 2012 4:58 pm

ekid wrote:...any other ideas?
Install a natural gas heating system.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett

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LH
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Re: How to take advantage of Natural Gas Collapse

Post by LH » Fri Jan 20, 2012 5:00 pm

Fpr those who did not know there was a collapse, here is a current reference to the natural gas collapse:

US natural gas: so much they'll be giving it away
Fri Jan 20, 2012
http://www.reuters.com/article/2012/01/ ... RS20120120

here is another reference to an earlier "collapse" in 2009, all relative of course : )

Natural Gas Market Collapse
August 21, 2009 by Allen
http://energy-musings.com/node/192

So anyway, since I use a gas furnace, will my home heating bill actually DROP now?

Wagnerjb
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Re: How to take advantage of Natural Gas Collapse

Post by Wagnerjb » Fri Jan 20, 2012 7:03 pm

ekid wrote:Who will benefit? I most recently asked about VG utilities fund- a minimum investment of $100,000. Someone suggested VPU, which I bought.

Doubting it has much gas utility...any other ideas?
If you live in a state with deregulated electric markets (I do in Texas), look into signing a longer term contract (with a fixed price) for your electricity. In most areas electricity prices are very closely aligned with natural gas prices.

Best wishes.
Andy

ourbrooks
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Re: How to take advantage of Natural Gas Collapse

Post by ourbrooks » Fri Jan 20, 2012 8:18 pm

Keep in mind that when natural gas prices drop, people quit drilling for natural gas as a primary objective and they delay producing gas zones in wells they've already drilled. If you look at the rig counts on the Baker Hughes site, since September, the percentage of wells being drilled for gas have dropped from 45% to 38%.

An oil or gas well typically produces for somewhere between 10 and 25 years, less for gas wells drilled in tight shales. In other words, without new drilling or workovers, production would decline by something like 4% - 10% a year.

Conclusion: the natural gas price collapse might not last all that long.

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Re: How to take advantage of Natural Gas Collapse

Post by TheEternalVortex » Fri Jan 20, 2012 8:30 pm

ourbrooks wrote:Keep in mind that when natural gas prices drop, people quit drilling for natural gas as a primary objective and they delay producing gas zones in wells they've already drilled. If you look at the rig counts on the Baker Hughes site, since September, the percentage of wells being drilled for gas have dropped from 45% to 38%.

An oil or gas well typically produces for somewhere between 10 and 25 years, less for gas wells drilled in tight shales. In other words, without new drilling or workovers, production would decline by something like 4% - 10% a year.

Conclusion: the natural gas price collapse might not last all that long.
Amazing that people respond to incentives.

AndroAsc
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Re: How to take advantage of Natural Gas Collapse

Post by AndroAsc » Fri Jan 20, 2012 11:42 pm

Natural Gas Collapse? What a joke... it's only a short-term transient phenomenon. Unless we discover a new cheap economical source of power within the next few decades or so, prices associated with fossil fuels will increase because of the finite and diminishing supply...

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LH
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Re: How to take advantage of Natural Gas Collapse

Post by LH » Sat Jan 21, 2012 12:13 am

AndroAsc wrote:Natural Gas Collapse? What a joke... it's only a short-term transient phenomenon. Unless we discover a new cheap economical source of power within the next few decades or so, prices associated with fossil fuels will increase because of the finite and diminishing supply...
Oil shale has 100 plus years of supply.

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jeffro
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Re: How to take advantage of Natural Gas Collapse

Post by jeffro » Sat Jan 21, 2012 12:45 am

AndroAsc wrote:Natural Gas Collapse? What a joke... it's only a short-term transient phenomenon. Unless we discover a new cheap economical source of power within the next few decades or so, prices associated with fossil fuels will increase because of the finite and diminishing supply...
In 2007 we spent $1.233 trillion on energy out of total GDP of $14.062 trillion in the United States. This is 8.77% of our GDP. With the market for this product being so large I find it hard to believe that we are not working harder on coming up with a sustainable solution. Its a HUGE MARKET!!! What do you guys think?

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Re: How to take advantage of Natural Gas Collapse

Post by Wagnerjb » Sat Jan 21, 2012 8:56 am

jeffro wrote: In 2007 we spent $1.233 trillion on energy out of total GDP of $14.062 trillion in the United States. This is 8.77% of our GDP. With the market for this product being so large I find it hard to believe that we are not working harder on coming up with a sustainable solution. Its a HUGE MARKET!!! What do you guys think?
Trust me....we are working hard on it. One possibility being considered is to re-fit the newly constructed LNG facilities for export. Ten years ago the industry was looking at a shortage of natural gas, so import facilities were built to handle liquified natural gas that is currently stranded in areas like Africa, the Middle East and Australia. This current glut has turned the economics and supply situation on its head. Those LNG import facilities are idle, but using them to export gas to countries that need natural gas (Japan, China, etc) is a logical market solution.

Best wishes.
Andy

larryswedroe
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Re: How to take advantage of Natural Gas Collapse

Post by larryswedroe » Sat Jan 21, 2012 9:15 am

Never confuse INFORMATION with value relevant information, information you can use to generate alpha.
If you know it the market does as well, too late to act

Now we all benefit from lower prices as consumers, directly and indirectly.

Best wishes
Larry

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magellan
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Re: How to take advantage of Natural Gas Collapse

Post by magellan » Sat Jan 21, 2012 9:37 am

The next boom could be in construction and operation of natural gas pipelines. My understanding is that pipeline capacity is severely limited in some areas.

The cost of moving natural gas from the point of production to the point of use is becoming an increasing share of the price and new pipeline capacity can be slow to come online. As the low price of gas drives more conversions to natural gas heating and greater reliance on natural gas for electricity generation, the trend will likely continue.

Of course, while it's a fun subject to follow, I'm not making any bets.

Jim

Edit - This link from FERC has a map of the average spot price of gas throughout the distribution system. The lowest price is $3.88 while the highest is $5.41. Since these are averages, they aren't indicative of the worst-case pricing during peak demand periods.

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Re: How to take advantage of Natural Gas Collapse

Post by 2beachcombers » Sat Jan 21, 2012 12:22 pm

JUST FINISHING DANIEL YERGIN'S QUEST.WONDERFUL HISTORICAL AND INCIETFUL BOOK ON ENERGY. NOW I AM RESEARCHING ETF'S.

MY CURRENT ALLOCATIONS ARE A LITTLE SHORT IN ENERGY. I AM CONSIDERING PURCHASING NTG(PIPELINES) FOR A LONG TIME BUY AND HOLD? YEA THE er IS TOO HIGH, BUT.

ALSO ATTACHED IS A GREAT CHART ON NAT GAS BTU COSTS.
http://gregor.us/americas/for-a-million-btu/
JERRY

Valuethinker
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Re: How to take advantage of Natural Gas Collapse

Post by Valuethinker » Sat Jan 21, 2012 12:39 pm

LH wrote:
AndroAsc wrote:Natural Gas Collapse? What a joke... it's only a short-term transient phenomenon. Unless we discover a new cheap economical source of power within the next few decades or so, prices associated with fossil fuels will increase because of the finite and diminishing supply...
Oil shale has 100 plus years of supply.
Let's not confuse how long it takes to extract something (an ordinary oil field has a 50 year + life, and does not peak until 20-30 years after discovery) with how much oil there is.

The original oil fields in Petrolia Ontario and in Pennsylvania, discovered in the 1860s, still produce oil (not very much, but they do).

There are some pretty bullish forecasts for 'tight' shale oil out there.

First let's not confuse oil-from-shale with shale oil. The latter is not oil (it's a kerogen, technically) and Shell and Exxon spent billions trying to extract it in Colorado in the 70s, the Colony project was abandoned-- one reason why Exxon eschews alternative oils. It's a technology we've never made work in scale.

Over to oil shale. Really bullish numbers.

Let's take one. 4 million barrels/ day, (say 10 times current production). IEA says its going to have a huge impact on US oil imports (implication of their numbers is something like twice that).

That would amount to... intake breath.. .wait for it... about TWENTY PERCENT... exhale breath... of current US consumption of 21 m b/d.

It would also amount to ..... INTAKE BREATH..... 4 FOUR PER CENT... of world consumption of over 100 m b/d in 2030 on IEA forecasts.

But, there are other countries, let's make that 16 m b/d.

16 percent of world consumption in 2030. I mean, OK, I'm underestimating technology. 25 m b/d. 25 per cent.

I think you get my drift. ie that there's not a set of outcomes for the world, where oil-from-shale will be pivotal in and of itself. Nice to have? Yes.

If you look at world oil supply, and the falloff rate in the world's major oil fields (4% to 8% a year) most of which are pretty mature, then you see that the world needs *all* of it to meet growing emerging markets demand:

- Canadian Oil Sands (probably can get to 10 m b/d)
- Gas-to-Liquids (natural gas to diesel fuel) - again only a couple of m b/d now, but could get bigger
- Brasil offshore (5 m b/d?). Other deep offshore
- northern Iraq
- Iran
- Oil-from-shale
-Coal-to-Oil the South African/ Tropsch process stuff. Again, hugely expensive, but SASOL makes it work, and they have licensed to the Chinese
- Arctic Oil- the Arctic Ocean is likely to be ice free, in part, all year round, within 20 years. Offshore Arctic production is likely to be important, and will be on the shortest shipping route then to the key Asian and European markets
- Enhanced Oil Recovery (EOR)- much greater use of CO2 injection underground to accelerate reservoir recovery


But this is not going to get us away from the need to conserve oil. If growth in car ownership continues in EM the way it has the last 10 years, then the big oil consumers (and the US motorist is still the world's single largest oil consumer) are going to need to do a lot of conservation.

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Re: How to take advantage of Natural Gas Collapse

Post by Valuethinker » Sat Jan 21, 2012 12:41 pm

Wagnerjb wrote:
jeffro wrote: In 2007 we spent $1.233 trillion on energy out of total GDP of $14.062 trillion in the United States. This is 8.77% of our GDP. With the market for this product being so large I find it hard to believe that we are not working harder on coming up with a sustainable solution. Its a HUGE MARKET!!! What do you guys think?
Trust me....we are working hard on it. One possibility being considered is to re-fit the newly constructed LNG facilities for export. Ten years ago the industry was looking at a shortage of natural gas, so import facilities were built to handle liquified natural gas that is currently stranded in areas like Africa, the Middle East and Australia. This current glut has turned the economics and supply situation on its head. Those LNG import facilities are idle, but using them to export gas to countries that need natural gas (Japan, China, etc) is a logical market solution.

Best wishes.
Which, ironically, will increase the price of NG for the American consumer. Because world traded LNG gas is at twice the price of US domestic gas. Particularly since Fukushima, Japanese demand has surged.

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magellan
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Re: How to take advantage of Natural Gas Collapse

Post by magellan » Sat Jan 21, 2012 12:45 pm

Valuethinker wrote:Which, ironically, will increase the price of NG for the American consumer. Because world traded LNG gas is at twice the price of US domestic gas. Particularly since Fukushima, Japanese demand has surged.
More on that thought from a recent post by Brad Plumer on Ezra Klein's blog here.

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Re: How to take advantage of Natural Gas Collapse

Post by Valuethinker » Sat Jan 21, 2012 12:51 pm

jeffro wrote:
AndroAsc wrote:Natural Gas Collapse? What a joke... it's only a short-term transient phenomenon. Unless we discover a new cheap economical source of power within the next few decades or so, prices associated with fossil fuels will increase because of the finite and diminishing supply...
In 2007 we spent $1.233 trillion on energy out of total GDP of $14.062 trillion in the United States. This is 8.77% of our GDP. With the market for this product being so large I find it hard to believe that we are not working harder on coming up with a sustainable solution. Its a HUGE MARKET!!! What do you guys think?
Roughly speaking

21 m b/d of oil x $100 b/ (actual US average was probably closer to 80 due to the gap between WTI and Brent Crude prices) x 365 days = c 766.5bn dollars pa

In other words, 62 per cent. of that was for oil. Most US oil usage is for transportation (about 70% personal transportation). Some is used as petrochemical feedstock.

Now oil does not substitute for natural gas. The transportation uses of NG are trivial at the moment. Similarly, oil is used for less than 1% of power generation. Where oil is used for home heating, (primarily in NE) it is because natural gas supply is not available.

So NG competes with coal, directly in power stations, or indirectly in home heating (heat pumps powered by electricity v. natural gas furnaces).

So on US energy spending, the 'sustainable solution' is to consume less oil. Which is hard, because of geography (distances driven), urban planning (American cities are hugely decentralized, perhaps the most so in the world outside of Saudi Arabia and a few other places) and a preference for large cars and for flying over trains.

Nonetheless it is possible. It is held as a nostrum that Americans will not allow politicians to raise gasoline taxes and certainly European levels (on the order of $3.00-4.00 per gallon in the UK case) are impossible- -let alone Australian or Canadian levels.

So the alternative is to drive fuel efficiency by other means. Which is being done. Given the average US car lasts c. 12.5 years, this is not a quick process, as c. 8-10% of cars are changed every year it takes a long time to turn the fleet 'over'.

On oil-from-shale the numbers are impressive, if they come through. 4 m b/d? That would be an achievement. If it comes through (I am agnostic on that although Bakken Shale stuff appears to be quite attractive).

You might get another 2m b/d from more aggressive offshore drilling assuming Florida, California et al. would permit it.

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Robert The Bruce
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Re: How to take advantage of Natural Gas Collapse

Post by Robert The Bruce » Sat Jan 21, 2012 1:03 pm

I assume the price drop is due to the increased availability of fracked gas. I would bet that regulations on the industry will increase and that will also affect supply (along with the increase in exports) and the price will rise. I'm a little cloudy on the when part, however.
The stone age didn't end for lack of stone.

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Re: How to take advantage of Natural Gas Collapse

Post by ourbrooks » Sat Jan 21, 2012 1:59 pm

I continue to be very sceptical about the estimates of the amount of natural gas available from tight formations by use of horizontal drilling and fracturing.
Most of those estimates seem to be based on well lifetimes from unstimulated (no fracing) wells or wells in different geology such as carbonates.
Evidence is accumulating that the wells drilled in tight shales don't produce for as long; my speculation is that the induced fractures don't extend as far out from the well bore as does natural porosity. Rather than 10-25 years, these wells may only last 5 years. That means that more wells will have to be drilled more often to maintain production.

Let me repeat again that the boom in drilling in tight shales is not due to new technology, contrary to popular press reports. Fracturing has been done commercially since 1952 and horizontal drilling has been done commercially since at least the 1970s. These technologies cost more than vertical drilling in porous formations; in the Bakken formation, for example, a well drilled with these technologies runs $600 a foot as versus $200 for conventional approaches. What has made the difference is high enough gas and oil prices to justify the additional cost.

To actually get the claimed oil/gas from these tight formations, the prices of oil/gas will have to stay high enough to compensate for the additional costs of more frequent, more expensive drilling. At least in the case of natural gas over the past half year, this doesn't seem to be the case; rig counts for gas wells are dropping rapidly.

The cost of actually drilling wells and getting the oil/gas out are often underestimated. Half the oil and gas that was ever underneath Texas is still there. The Yates ranch is estimated to still have over a billion barrels of oil underneath it. The problem is, it costs more to get this oil out than it's worth. The problem in the U.S. is not finding enough oil and gas; it's finding enough CHEAP oil and gas.

From an investment standpoint, investments based on long term, low prices of gas or oil probably are much riskier than they sound on the basis of recent gas price quotes.

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CaliJim
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Re: How to take advantage of Natural Gas Collapse

Post by CaliJim » Sat Jan 21, 2012 3:26 pm

Objection your honor. The question calls for speculation on the part of the witness.

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Re: How to take advantage of Natural Gas Collapse

Post by Wagnerjb » Sat Jan 21, 2012 3:38 pm

Valuethinker wrote:Which, ironically, will increase the price of NG for the American consumer. Because world traded LNG gas is at twice the price of US domestic gas. Particularly since Fukushima, Japanese demand has surged.
I don't see any irony in it. Just market economics. Back several years ago when hurricane Katrina knocked out about six refineries on the US gulf coast, European energy companies exported gasoline to the US (to help make up the supply shortfall). That drove energy prices up in Europe.

If the US refused to export resources (wheat, for example) we might see lower food prices here too. But I think in the end, open economies and exports makes the whole world a better place.

Best wishes.
Andy

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Re: How to take advantage of Natural Gas Collapse

Post by Valuethinker » Sun Jan 22, 2012 2:21 pm

Wagnerjb wrote:
Valuethinker wrote:Which, ironically, will increase the price of NG for the American consumer. Because world traded LNG gas is at twice the price of US domestic gas. Particularly since Fukushima, Japanese demand has surged.
I don't see any irony in it. Just market economics. Back several years ago when hurricane Katrina knocked out about six refineries on the US gulf coast, European energy companies exported gasoline to the US (to help make up the supply shortfall). That drove energy prices up in Europe.

If the US refused to export resources (wheat, for example) we might see lower food prices here too. But I think in the end, open economies and exports makes the whole world a better place.

Best wishes.
Wagnerjb

I think the irony is that normally exports are seen as a good thing, but there would be a downside for the US consumer. Maybe Brits by nature see irony in everything? ;-). ;-).

Of course I agree with what you say.

We went through a 'made in Canada oil price' in the early 80s, a horror called (without acknowledgement of the irony that the Bolsheviks had a period of market liberalization in early 20s Russia, before the Stalinist crackdown, with the same initials) called 'The New Energy Policy' or NEP, which is a bitter swearword in Alberta to this day and no small reason why Liberals (ie the party) are as rare as hen's teeth in western Canada to this day (remembering that the social democratic, ie more left wing, party the NDP has often done well in the west).

My professor of energy economics wrote to the Prime Minister and suggested a 'made in Canada Mercedes price' but received no answer.

The point which he was trying to make is that by restricting oil pricing below world levels, Canada was losing the opportunity cost of selling that oil abroad and buying other goods and services with it.

In addition, lower domestic oil prices caused higher domestic consumption.

Argentina is in this trap now, a series of export restrictions on beef (a national staple), natural gas etc. because of rising prices domestically.

It's the equivalent of blocking up your ports because other countries have rocky coastlines.

So I would be all in favour of the US exporting gas, lucratively, as LNG. Even if that drives up domestic prices (which it would).

However we can bet not everyone in the US Congress would be in agreement ;-).

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Re: How to take advantage of Natural Gas Collapse

Post by Valuethinker » Sun Jan 22, 2012 2:31 pm

ourbrooks wrote:
The cost of actually drilling wells and getting the oil/gas out are often underestimated. Half the oil and gas that was ever underneath Texas is still there. The Yates ranch is estimated to still have over a billion barrels of oil underneath it. The problem is, it costs more to get this oil out than it's worth. The problem in the U.S. is not finding enough oil and gas; it's finding enough CHEAP oil and gas.

From an investment standpoint, investments based on long term, low prices of gas or oil probably are much riskier than they sound on the basis of recent gas price quotes.
OK the predominant economic model is the Hotelling one (1931 I think) that, for any scarce resource, over time the price of that resource will rise reflecting increasing scarcity-- it is by price that a market economy regulates demand.

Adelman, the doyen of energy economists, argues that oil prices exhibit a backward bending supply curve: as prices rise, OPEC producers cut back. That's almost certainly no longer the case as the Saudis themselves now (see FT this week) have admitted they need $100 per barrel oil to balance the state budget-- and their spare capacity seems quite limited. World oil reserves, about 35% in OPEC hands, continue to bend back towards OPEC--- IEA says 45% in 2030 I believe.

What has prevented oil and gas prices rising from as much as a naive Hotelling model is rapid technological change in the industry. Just think of how far we have come offshore since the North Sea in the 70s (300 foot of water, but bad storms). Brasil is 3000 feet of water (and 6000 feet of sand under that).

For example one place where the prospect of capturing carbon from power stations is welcomed: a big project is full steam ahead in Texas is going to do just that. CO2 is not a waste product in Texas, it is a valuable gas in its own right, used for reinjection (Enhanced Oil Recovery EOR).

So we've never really seen a scarcity price for oil and gas-- yet. The cycles in oil have been driven by the short term inelasticity of supply and demand and geopolitical disruptions. It takes a looong time for people to buy and drive more efficient cars, for example. or more efficient airliners. Even in countries like Japan that have made a fetish of energy conservation.

Gas it's been all about better and better extraction technology. Consumption then catches up as prices fall-- eg the rise and rise of Combined Cycle Gas Turbines for electricity (there was also big technology change, and utility deregulation, that made that far more attractive in the mid 90s than hitherto).

However maybe, just maybe, we are now on the Hotelling Curve. Where higher prices have brought on new sources of (expensive) supply like Canadian oil sands.

The difficulty is uncertainty of future price is a huge deterrent to constructing $10bn facilities: the cost of an offshore production platform network, of an oil sands plant, of a Gas-to-Liquids plant, a Coal-to-Oil plant etc.

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Re: How to take advantage of Natural Gas Collapse

Post by winterescape » Sun Jan 22, 2012 6:35 pm

I updated the crossover point on my home heating system. Instead of running the heatpump down to 10 degrees outside temp it now switches to the gas furnace at 30 degrees.

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