Saturday, February 25, 2012

Why This Time Could Be Different: Rising Oil Prices Are Being Offset By Falling Natural Gas Prices

WSJ Blog -- "Soaring oil prices in the spring of 2008 sent gasoline prices surging and accelerated the recession. Now, rising gas prices are threatening the recovery. But lower natural gas and utility costs this time around might limit some of the damage, says Deutsche Bank chief U.S. economist Joseph LaVorgna.

In a note to clients last Tuesday, titled “Why this time could be different,” LaVorgna reminds us of his rule of thumb for measuring the effect of run-ups at the pump: a one-cent increase in gasoline prices increases household energy consumption by about $1.4 billion. With the 29-cent jump in gas prices over the past two months, that would translate into about $40.6 billion in higher household energy costs.

Today, he says the economy can handle the higher oil prices “provided that they do not increase substantially further and remain at elevated levels on a longer-term basis.”

One key reason: Lower natural gas prices, and lower utility consumption (including electricity) due to a warm winter, are offsetting much of the higher oil costs. LaVorgna puts the benefit from both at about $16 billion, or almost half of the recent run-up in gasoline prices (assuming gasoline prices hold near their current levels)."

MP: The chart above shows the historical relationship between monthly natural gas prices (data here) and crude oil prices (data here) with both price series converted to index equal to 100 in January 2002.  Both oil and natural gas prices spiked in 2008, and both series rose together and more than doubled between mid-2006 and mid-2008, and then both fell together through early 2009.  Since then oil prices have increased by 2.5 times, from about $40 in February 2009 to more than $100 today.  In contrast, natural gas prices have fallen by about 50% since early 2009, from about $5 to $2.50 per million BTUs.  The huge departure over the last few years from the typical historical, positive correlation between oil and natural gas prices explains why this time really could be different, as Joe LaVorgna suggests.

Update: PPL Electric Utilities in Pennsylvania just announced that it will lower electricity prices for 586,000 residential customers by almost 11% on March 1.  A company spokesman said that the lower rates were partly because of the abundance of natural gas, which has been driving down the cost of electricity generation.  (HT: John Hanger)

27 Comments:

At 2/25/2012 8:51 PM, OpenID thefarmerslife said...

We can see this happening on the farm. In fact we just filled the fuel tanks on our tractors so we can refill the bulk storage with what may end up being relatively cheap diesel.

The price of anhydrous fertilizer has been dropping since fall. It's derived from natural gas. I don't really know if the price correlates to natural gas as a fuel or not but it's interesting to note in light of this chart. Perceived demand for corn acres may be in play as well.

 
At 2/25/2012 9:24 PM, Blogger PeakTrader said...

Yes, lower natural gas prices will partially offset higher oil prices.

U.S. Energy Consumption by Source - 2009 (total = 94.578 quadtrillion btu)

Petroleum 37%
Natural Gas 25%
Coal 21%
Nuclear Electric Power 9%
Renewable Energy 8%

(Renewable Energy: Hydropower - 35%, Wood - 24%, Biofuels - 20%, Wind - 9%, Biomass Waste - 6%, Geothermal - 5%, Solar - 1%)

 
At 2/25/2012 10:10 PM, Blogger Bruce Hall said...

Given the abundance of natural gas, is there any doubt that CNG would be a natural choice as an alternative to oil-based vehicle fuels?

http://hallofrecord.blogspot.com/2012/01/natural-solution-to-energy-needs.html

The vehicle technology is proven and the ease of expanding distribution/refueling stations simply needs a concerted effort. $5/gal. gasoline might provide the push.

 
At 2/25/2012 10:43 PM, Blogger kmg said...

Bruce Hall,

Except that regulatory hurdles have ensured that the cost of converting a car to natgas is $6500 to $12,000, where in the absence of govt. meddling, it would be just $1000 (the price in many other countries).

What is absurd is that we will export one liquid fuel to Japan and India, while importing another liquid fuel from a similar distance.

 
At 2/25/2012 10:58 PM, Blogger morganovich said...

"Today, he says the economy can handle the higher oil prices “provided that they do not increase substantially further and remain at elevated levels on a longer-term basis.”

well, at least until summer.

very little AC runs on gas.

 
At 2/25/2012 11:26 PM, Blogger Benjamin said...

This guy in Oklahoma sells CNG trucks off the lot, used, for $15k and under.

http://cngvehicles.net/

I have no connection to him, and he may be great or a crook, I don't know.

I agree with sentiments expressed that every reg must assist, not hinder, the introduction of CNG cars.

Fleets are switching over everywhere.

 
At 2/26/2012 4:34 AM, Blogger marmico said...

Line 26, BEA Table 2.3.5U is called Energy goods and services

That's the number to watch. The January 2012 data will be released this Thursday. Households tend to retrench (e.g., lower light vehicle purchases, higher staycations) when energy goods and services climb above 6% of personal consumption expenditures. The December 2011 data point was 5.7%.

 
At 2/26/2012 6:54 AM, Blogger marmico said...

A quick comment on the Penn electricity updates. The reduction is for the commodity price component which probably represents about 60% of total electricity costs. Distribution costs inexhorably rise.

More germane to the blog post is the "residential" cost of natty gas and electricity prices which can be found here relative to gasoline prices. As an aside, I didn't realize that there was so much seasonality to wholesale residential electricity and natty gas prices, which I suppose are smoothed by the energy providers in the billings.

As Vangel would say: If I was a natty gas producer, I'd be shitting bricks.

 
At 2/26/2012 8:45 AM, Blogger Bruce Hall said...

kmg,

Of course it is government regulation and taxation that stand in the way of effective and efficient use of energy resources.

That's why Obama wants to reduce regulation. ;-;

Nevertheless, the future belongs more to direct energy sources for transportation than indirect [electric] sources which require $10,000 tax incentives. We just have to vote correctly.

 
At 2/26/2012 9:33 AM, Blogger PeakTrader said...

Will natural gas prices begin to rise?

UNG - United States Natural Gas Fund ETF - shows after a 4-for-1 reverse stock split recently (to prevent it from falling below $5 a share) peaked in 2008 above $500 a share, and closed Friday a little over $21 a share.

 
At 2/26/2012 10:17 AM, Blogger morganovich said...

"Fleets are switching over everywhere."

actually, no.

it's a very small number at this point.

the whole industry is < $500 million a year. (for engines)

as someone who has investment in this space, i can tell you that the numbers are still very small and the costs extremely high, especially due to draconian regulations on the tanks.

that said, last year, the EPA did, quietly, make it much easier for this transition to occur.

the rule used to be that to convert a truck, you had to yank the engine, emissions test it, do the conversion, emissions test it again, and then you could put it back. the testing exceeded the cost of the conversion.

the new rule is that you can do it once for each type of engine, which is much easier to deal with.

that said, all LNG or CNG (like westport, the massive subsidy sucking money losing government darling) engines have some serious limitations for class 8 trucks. they run very hot and cannot provide the kinds of torque or horsepower of a diesel engine. they have repeated failed on high horsepower tests and in difficult applications (australian autotrains and climbing the rockies with a big load)

i think the future of 500hp+ class 8 engines is in dual fuel that uses part lng/cng and part diesel.

i know a number of folks using these very successfully.

if the US can get tank costs down from $15k to $2-3k, this will really take off.

all that would take is a change from the carbon fiber wound tanks currently required to the welded steel/aluminum the rest of the world uses.

it's a sad day when nigerian 7 up bottler fleets are using better tech than their us counterparts because our regs make it infeasible here.

 
At 2/26/2012 10:44 AM, Blogger PeakTrader said...

Natural gas production has been a by-product of fracking.

If a recession begins later this year, oil prices will fall below $50 a barrel and there will be less natural gas production.

Also, utilities are shifting from coal to natural gas, while there's also a shift from crude oil to natural gas.

 
At 2/26/2012 11:24 AM, Blogger morganovich said...

pt-

i have doubts we could see a price that low.

the dollar has lost 22% of it's value since late 2008.

thus, in world terms, 50 becomes more like $61, even before inflation.

$50 would be far below the 2008 low in constant dollar/currency adjusted terms.

 
At 2/26/2012 2:48 PM, Blogger Ron H. said...

morganovich: "the rule used to be that to convert a truck, you had to yank the engine, emissions test it, do the conversion, emissions test it again, and then you could put it back. the testing exceeded the cost of the conversion."

Do you have any idea why there is a requirement to yank the engine to do an emissions test rather than doing it in the vehicle - other than to make the cost prohibitive for individuals and/or as a political reward to those involved in actually performing the conversion?

Damn! Cynicism is so easy these days.

Although I'm not familiar with the total conversion process, I can't imagine why the engine would ever need to out of the vehicle. It would seem that most of the conversion involves the fuel system, and the basic engine not so much.

 
At 2/26/2012 3:31 PM, Blogger morganovich said...

ron-

my understanding is that it was to make sure that you were measuring just the effects on the engine, devoid of the exhaust system, cat converter, etc.

it's a classic example of some engineers looking for "most accurate" while being completely oblivious to the reality and the difficulty of compliance.

tell the DOT to measure body fat and they'd make you suck it all out of your body, weigh it, and out it back.

 
At 2/26/2012 6:23 PM, Blogger Ron H. said...

morganovich,

"my understanding is that it was to make sure that you were measuring just the effects on the engine, devoid of the exhaust system, cat converter, etc."

Thanks. I suspected it didn't add any real world value - but only transfers money to those who get paid to remove the body fat and then replace it. :)

 
At 2/26/2012 6:41 PM, Blogger rjs said...

what about those working at walmart for 28 hours a week because walmart doesnt want to pay benefits to full time workers?

what percentage of their weekly takehome pay does it take to fill their gastank?

 
At 2/26/2012 9:03 PM, Blogger juandos said...

"what percentage of their weekly takehome pay does it take to fill their gastank?"...

The closer the employee lives to his/her workplace the more moot that question becomes...

 
At 2/26/2012 11:15 PM, Blogger VangelV said...

Given the abundance of natural gas, is there any doubt that CNG would be a natural choice as an alternative to oil-based vehicle fuels?

But economic natural gas is clearly not a 'given.' The shale gas industry is decimated because it has to keep drilling to prevent huge write-offs of leases that are on the balance sheets but the production is causing huge losses that have yet to make it to the income statements because the EURs allow depreciation costs to be underestimated. But that does not help the Cash Flow Statements where the picture is very clear. Which is why so many CEOs are mentioning asset sales and funding gaps on the conference calls.

Keep an eye on the gas rigs. Some time this summer we should see a nice decline as a few of the lower end companies go under and others reduce the pace of drilling. But once the hedge funds see a trend change there could be massive heat on the sector as it becomes safe to short the purer shale plays. At that point nobody will be talking about an abundance of economic fossil fuel production and many would have wished to have been buying coal companies while they were so cheap.

 
At 2/27/2012 1:24 AM, Blogger jorod said...

Nonsense. That would be great if my car ran on natural gas. So fertilizer is cheaper but the price of corn is going up. Hurrah.

 
At 2/27/2012 2:02 AM, Blogger PeakTrader said...

This comment has been removed by the author.

 
At 2/27/2012 10:24 AM, Blogger VangelV said...

You can thank the Fed for smoothing-out business cycles, particularly at the height of the Information Revolution from 1982-07, which helped raise U.S. living standards.

Actually, the Fed is responsible for creating the business cycles in the first place. It creates a bubble when it floods the system with money and credit and tries to limit the damage when the bubble bursts by flooding the system with more money and credit.

Also, countries need dollars to buy oil. So, they sell their goods to the U.S., receive dollars, buy oil, and those dollars are invested in the U.S.

That is what makes the USD vulnerable. As countries shift to using other currencies to buy and sell oil demand for petrodollars falls sharply. There is no reason why Russia or Brazil should sell oil by using USDs. They can use RMB, Yen, SF, or even gold, copper, or wheat.

It seems that you still have a lot to learn.

 
At 2/27/2012 10:43 AM, Blogger morganovich said...

"You can thank the Fed for smoothing-out business cycles"

if you think the last 15 years has been smooth, i'd hate to see what you think is "volatile".

you can thank the fed for the massive debt accumulation of 2000-7 and the massive crash and wealth destruction it caused.

they are not the only guilty party (cra and the gse's played a role to be sure) but they are the ones who poured gasoline on that fire.

 
At 2/27/2012 1:28 PM, Blogger morganovich said...

water prices may be a future issue:



Mon, 2012-02-27 08:18

First high gas prices, now water. A shocking new report about the nation's crumbling drinking water system says that Americans should expect their bills to double or triple to cover repairs just to keep their faucets pouring. That means adding up to $900 a year more for water, nearly equal the amount of the newly extended payroll tax cut.

Fixing and expanding underground drinking water systems will cost over $1 trillion in the next 25 years and users will get socked with the bill, according to the American Water Works Association.

As with most infrastructure investments, spending heavily now means less costs down the road. But with little appetite in the country for even trickling taxes now, a delayed and more expensive fix is almost guaranteed. The association figures that spending to fix leaky water systems will double from roughly $13 billion a year today to $30 billion annually by 2040.

"Because pipe assets last a long time, water systems that were built in the later part of the 19th century and throughout much of the 20th century have, for the most part, never experienced the need for pipe replacement on a large scale," said the report provided to Washington Secrets. "The dawn of an era in which the assets will need to be replaced puts growing stress on communities that will continue to increase for decades to come."

What kind of stress? Families can expect to pay at least $300-$550 more for water in taxes and fees just to keep their current systems operating. Add growth and improved systems, and that bill jumps to $900 for a family of three, said the report.

Currently, Americans pay about $400 a month in water taxes and fees

 
At 2/27/2012 6:38 PM, Blogger Ron H. said...

juandos: "The closer the employee lives to his/her workplace the more moot that question becomes..."

Yes, for some it's not an issue at all.

 
At 2/27/2012 11:50 PM, Blogger Hydra said...

CNG will have a lower energy density than Gas and require more frequent fill ups.

CNG will more likely explode than gasoline.

 
At 2/27/2012 11:50 PM, Blogger Hydra said...

CNG will have a lower energy density than Gas and require more frequent fill ups.

CNG will more likely explode than gasoline.

 

Post a Comment

Links to this post:

Create a Link

<< Home