IngentaConnect The price of natural gas

Abstract:

Natural gas used to be a relatively Cheap primary energy source, always at a discount to crude oil (on a comparative British thermal unit basis). It gradually evolved into a major resource during the 20th century — reaching a 24 per cent share of global primary energy in 1999.

In the year 2000, natural gas prices in the USA rose to unheard-of highs of $10/million Btu, ushering in a new era, with natural gas at a 120 per cent premium to crude oil. This clearly was a watershed for gas, somehow similar to the 1973-74 watershed for oil prices. And similarly, any return to the status quo-ante looks rather improbable, although a number of experts (alongside the International Energy Agency) still believe the 2000 price `spike' to have been “only transitory”

The consequences of higher gas prices (at a level equal to crude oil prices on a Btu basis) will be multifaceted and momentous, altering habits and uses in downstream industries and economic sectors, as well as providing added income for major gas-exporters, such as Russia, Canada and Algeria.

Another potential consequence of the 2000 watershed might be to propel US standard prices (such as the `Henry Hub' spot) to international status and gas price-setter, as the `WTI spot' became an “international benchmark” for crude oils in the post-1993 era.

For the time being, the equality of gas and oil prices has become the new norm; but, in the longer term, a discount of crude oil relative to natural gas might be envisaged, as the latter is a cleaner fuel and emits less carbon dioxide when used.

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