The talk about energy sources often finds itself striking on the issue of cost-effectiveness. One source fondly mentioned is natural gas, which makes one wonder, why is natural gas so cheap?
Natural gas is cheap because it is a plentiful resource. The increase in hydraulic fracturing technology has made it easier to extract natural gas, causing a surplus in the market, resulting in lower prices.
Read on to add more depth to your understanding of natural gas prices and the factors affecting its ongoing trends.
Dissecting the Natural Gas: What It Is and Where It Comes From
Natural gas is a widely utilized energy source, known for its blue flame when burned. But what is it and from where does it originate? These are pertinent questions to ask when considering why natural gas remains so affordable. Let’s delve deeper into the intriguing world of this abundant resource.
Behind the Burning Blue Flame: The Composition of Natural Gas
Natural gas is primarily composed of methane, a potent greenhouse gas. In fact, the concentration of methane accounts for about 70% to 90% of natural gas. Additionally, it contains several other hydrocarbons such as ethane, propane, butane, and pentane. Non-hydrocarbon gases, like nitrogen and carbon dioxide, are also found in much smaller portions.
The clean burning nature of natural gas, seen from its blue flame, comes from methane. When methane is burned, it produces large amounts of energy while emitting carbon dioxide and water vapor, two benign emissions, in a lot less volume than other fossil fuels.
Digging Deeper: Unearthing the Natural Gas
The Concept of Fossil Fuels
Natural gas, similar to oil and coal, is a type of fossil fuel. These resources are labeled as such because they’re formed over millions of years through the decomposition of plants and animals. This lengthy and complex process involves high temperature, intense pressure, and burial conditions, which eventually convert organic matters into petroleum, coal or natural gas.
The Extraction Process: Drilling and Mining
The extraction process of natural gas plays a significant role in its cost. Generally, it involves two main steps: exploration and production. During the exploration phase, geological surveys and seismic tests are conducted to locate potential gas deposits.
Once a potential field is identified, drilling ensues. The drilling can either be vertical or horizontal, depending on the formation and location of the gas deposit. extraction has become more efficient and accessible, primarily because of advancements in drilling technology.
For example, the advent of hydraulic fracturing (or fracking) and horizontal drilling techniques has revolutionized the gas industry. These innovations have made it possible to extract gas from areas that were previously considered unreachable or uneconomical. And as technology continues to progress, the extraction of natural gas is likely to become even more economical, leading to a further decrease in its price.
Decoding the Pricing of Natural Gas
The price of natural gas is determined by a variety of factors, including its supply and demand, the weather, and the cost of extracting and transporting it. These considerations affect whether natural gas is cheap or expensive, and they can vary considerably from one country or region to another.
Supply and Demand: The Economic Principle Behind the Pricing
One of the key influences on the price of natural gas is the principle of supply and demand. This basic law of economics states that if a product’s supply exceeds its demand, the price will drop. Conversely, if the demand exceeds supply, the price will rise.
For natural gas, significant reserves in countries like the United States, Russia, and Iran help maintain a high global supply. Furthermore, technological advancements, such as hydraulic fracturing (fracking), have allowed us to access more and more natural gas deposits, further increasing the supply.
On the other hand, demand is influenced by various factors such as industrial expansion, population growth, and the push towards cleaner, more efficient energy sources. Here’s a table showing the world’s top natural gas consumers:
|Consumption (Billion Cubic Meters)
Currently, the supply is outpacing the demand globally, which is one of the reasons why natural gas is so cheap.
The Role of Weather and Its Impact on Prices
The weather can have a substantial impact on natural gas prices because it significantly affects demand. In colder weather, people use more natural gas for heating, leading to an increase in demand, while in warmer weather, demand typically decreases.
For instance, during the unusually severe winter of 2017-2018 in the United States, demand for natural gas soared, causing prices to increase temporarily. Conversely, mild weather can lead to a surplus in supply, lowering prices.
So, while there are many factors at play when it comes to the price of natural gas, it’s the balance of supply and demand, impacted by factors such as weather and technological advancements, that typically have the largest influence on the price we pay for this vital energy source.
Exploring the World of Shale Gas Revolution
In recent years, natural gas has emerged as a cheap and abundant energy source, much of which is attributed to the shale gas revolution. Let’s delve in deeper to understand this shift.
What is Shale Gas?
Shale gas is a natural gas that is trapped within shale formations, a fine-grained sedimentary rock. Shale gas has become an increasingly important source of natural gas in the United States and around the world. Owing to advancements in drilling and extraction technologies, particularly hydraulic fracturing, shale gas production has increased vastly.
Fracking: A Controversial Extraction Method
Hydraulic fracturing, also known as fracking, is the method employed to extract shale gas. While the process has enabled the energy sector to tap into vast reserves of previously inaccessible natural gas, it has also been the source of substantial controversy.
The Process of Fracking
The process of fracking involves drilling down into the earth before a high-pressure water mixture is directed at the rock to release the gas inside. Water, sand and chemicals are injected into the rock at high pressure, allowing the gas to flow out to the head of the well.
The Environmental and Economical Implications
While fracking has been economically beneficial, generating jobs and contributing to energy security, it has also posed several environmental challenges. There have been concerns about the significant amount of water used in fracking and potential contamination of ground and surface water. Despite these concerns, the economics of fracking make natural gas a cheaper source of energy.
For instance, a closer look at the data reveals that natural gas prices have been consistently lower than coal and oil. Here’s a comparative look at average fuel costs:
|Average Cost (USD per million BTU)
It’s clear from the table above that natural gas is a cost-competitive energy source. The shale gas revolution, albeit with its share of controversies, has indeed been instrumental in making natural gas an affordable energy option.
Understanding Energy Market Deregulation
In order to fully understand why natural gas is so cheap, it’s essential to understand some pertinent details about energy market deregulation.
What is Deregulation?
Deregulation in the context of energy markets often refers to the reduction or elimination of government power in a particular market, often enacted to create more competition within the industry. It implies the removal of restrictions and barriers for new entrants, leading to the increase of competition among different players in the industry. This concept has been applied in various sectors of the economy including airline and telecommunication industries, and more recently in the energy industry.
Prior to deregulation, a few, large companies dominated the energy industry, setting the prices and controlling supply. With deregulation, the market was opened up, allowing smaller companies to compete, which in turn, often leads to lower costs for consumers.
Deregulation and Natural Gas: A Cost-effective Combination
The deregulation of the energy market had a significant impact on the price of natural gas. Prior to deregulation, the price of natural gas was largely controlled by a small number of large companies which could manipulate the prices to their advantage. When the market was deregulated, competition increased and prices fell, benefiting consumers.
Furthermore, the abundance of natural gas supplies, particularly in the United States, has also contributed to its low cost. Advances in drilling technology have made it easier and more cost-effective to extract natural gas, especially from shale formations. This abundant supply, coupled with heightened competition due to deregulation, has kept the prices of natural gas relatively low.
According to the US Energy Information Administration, the price of natural gas has remained relatively stable over the past decade, despite fluctuations in demand. This can be largely attributed to the market deregulation and the steady production of this fuel resource.
Thus, understanding the effects of energy market deregulation, along with factors like supply and production costs, is vital in comprehending why natural gas continues to be a cost-effective energy option.
The Green Energy Transition: A Factor in Natural Gas Pricing
The world has started to shift its focus towards renewable energy sources such as wind, solar, and hydroelectric power over the past couple of years, following increased awareness on the need to mitigate climate change. This change in the global energy landscape has led to a profound influence on the pricing of traditional power sources, including natural gas.
Rising Popularity of Renewable Energy Sources
The transition towards green energy is mainly driven by global initiatives to reduce greenhouse gas emissions and a need to achieve sustainability. Over the last decade, investment in green energy has skyrocketed, leading to an increase in the share of renewables in the energy mix.
The International Energy Agency reports that the world’s total renewable-based power capacity rose by 50% in 2020 alone. As a result, the decrease in the demand for fossil fuels correlates with a drop in its prices. While coal and oil have been the most affected, natural gas has also seen price fluctuations.
Moreover, advances in technology have made it cheaper and more practical to harness renewable energy. And with the added benefit of being eco-friendlier, it’s been giving tough competition to natural gas.
How Natural Gas Acts as a Bridge Fuel
Natural Gas has often been described as a ‘bridge fuel.’ While we transition to a green future, natural gas serves as an alternative to coal and oil, given its lower carbon emissions.
As governments across the world impose stricter regulations on carbon emissions, many power plants have turned to natural gas as a cleaner energy source. This increase in demand has helped offset the decrease in natural gas prices somewhat, caused by the rise in renewables.
Despite this, as renewable technologies continue to improve and become even more cost competitive, it’s expected to further eat into the market share of natural gas, leading to even lower prices for consumers. Also, as the bridge to a renewable future nears completion, natural gas might find its demand falling sharply, leading to even lower prices for it.
Natural Gas Pricing Globally: A Comparative Study
The pricing of natural gas often varies depending on whether the purchase is made within the spot market or under long-term contracts. Both have different implications for the buyer and the seller that ultimately determine the pricing of natural gas.
Spot Market Pricing vs. Long-Term Contracts
The spot market or the physical market is where natural gas is traded for immediate delivery. The price in the spot market is often influenced by immediate demand and supply situations. If demand is higher than the supply, prices can escalate quickly, and vice versa. This makes spot market pricing extremely volatile.
In contrast, long-term contracts allow buyers and sellers to agree on a fixed price for natural gas for an extended period, often several years. These agreements bring certainty and stability to the pricing but do not allow either party to take advantage of short-term fluctuations in the market price.
A Glimpse at Natural Gas Pricing Across the Globe
Pricing of natural gas, just like any other commodity, differs from one geographical region to another due to varying factors. These factors include but are not limited to: local production and demand, cost of import or export, and government regulations.
For instance, the U.S., being the world’s largest producer of natural gas, has some of the lowest prices globally. This can easily be illustrated with the help of a table.
|Price (USD per MMBtu)
As the table illustrates, the price of natural gas in Japan, an import-dependent country, is significantly higher than that in the U.S., a major producer.
This comparative analysis underlines why natural gas is particularly cheap in some areas, such as the U.S. However, it’s important to realize that these prices are not static and fluctuate due to numerous economic and geopolitical factors.
Demystifying LNG and Its Role in Pricing
Liquefied Natural Gas, commonly known as LNG, plays a vital role in determining the price of natural gas. This section aims to demystify this seemingly complex subject and help you grasp why natural gas is so inexpensive.
The Concept of Liquefied Natural Gas (LNG)
LNG is an abbreviation for Liquefied Natural Gas. We derive it by converting natural gas into a liquid state. This conversion is essential as it reduces the volume of the gas by approximately 600 times, making it easier to transport and store. The liquefaction process involves purifying the natural gas and cooling it at -162 degrees Celsius, which transforms it into a clear, colorless, non-toxic liquid.
The key components of natural gas that are retained in LNG include methane, ethane, and some traces of propane and butane. It is essential to understand that LNG itself is odorless. The rotten-egg smell we commonly associate with natural gas is due to an artificially added substance called Mercaptan, used to detect leaks.
LNG Trade: How it Impacts Pricing
LNG trade significantly impacts the pricing of natural gas. When large volumes of LNG are available in the market, the price of natural gas goes down due to the laws of supply and demand. This is because the transportation and storage of LNG are considerably more economical compared to natural gas in its gaseous form.
The process of regasification, when liquefied natural gas is converted back to its gaseous state, is another factor affecting the price. If the cost of regasification is high in a particular region, the price of natural gas in that area will skyrocket.
As of 2021, ample supplies of liquefied natural gas worldwide have significantly reduced the price of natural gas. The United States, in particular, has ramped up its LNG exports in recent years, which has helped to keep the price of natural gas relatively low. Below is a table presenting key figures related to global LNG production.
|LNG Production (Metric Tons)
|Qatar, Australia, Malaysia
|Qatar, Australia, USA
|Qatar, Australia, USA, Russia
By understanding how LNG trade works and its implications on the price structure of natural gas, it becomes clearer why natural gas is as cheap as it currently is. The combination of efficient transport, inexpensive storage, and economical regasification processes effectively diminish the price of natural gas, making it an affordable energy source.