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Will Tumbling Natural Gas Prices Bring Oil Prices Down with Them?

Posted by Jeff Rubin on December 9th, 2009 under SmallerWorldTags: , , , ,  • 11 Comments

With the price of gas now trading at a record low—one third that of oil (per unit of energy)—its hold over the price of its hydrocarbon cousin should be its strongest ever. Yet oil prices have not only resisted gas’ gravitational pull but have moved in the opposite direction over most of the year.

And with good reason.

To be sure, there is room for substitution between the two fuels. When natural gas is cheap relative to oil, it encourages petrochemical producers to switch from crude to natural gas feedstocks. And it encourages households to switch from burning oil to burning natural gas to heat their homes. Cheap natural gas also encourages utility companies to switch from generating oil-fired electrical power to natural gas-fired power.

But what it doesn’t do is encourage operators of cars, planes, trucks, railways and ships to switch from oil to natural gas. Not that they wouldn’t want to do it at today’s prices if they could, but unfortunately natural gas can’t be used as a transport fuel. And over 60 per cent of all the oil burnt in the world is used precisely for this purpose.

On top of that, almost 90 per cent of the growth in world oil demand every year comes not from the need for home heating oil or for chemical feedstocks, but from demand for gasoline, diesel or jet fuel, for which there is no substitute.

How sustainable today’s low gas prices are remains to be seen. While the advent of shale gas has changed the supply equation, we have not stress-tested today’s prices over a full cyclical rebound in the demand for natural gas from either industrial users or power-generating plants, let alone through a bitter-cold winter. Until we do, it’s premature to herald a new era of cheap and abundant gas.

But even if today’s natural gas prices are sustainable, they are no more likely to bring down oil prices in the future than they are today.

The reason natural gas can’t substitute for oil as a transit fuel is that oil packs four times the energy density that natural gas does (think gas tanks roughly four times as large). And while it’s possible to raise the energy density of natural gas by liquefying it, you need to cool it to –162 degrees Celsius to do so, which requires a tremendous amount of energy. And even then, liquefied natural gas is still only 60 per cent as energy-dense as diesel fuel or gasoline.

Until we can find an economically efficient way for natural gas to pack a far greater energy punch, all the shale gas in the world won’t stop oil prices from getting back to triple-digit range.

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  • benisonstar

    Firstly to save the “car” we need to slow down. In 20 years I can't see personal transport vehicles being able to accelerate from 0-60 in less than 10 seconds as well they will likely have a top speed of 100 km/hour ( save on insurance claims, health care costs, funeral planning…etc…etc…). That is if we still have the right to personal transport vehicles.

    There is a design, a plan, and a very well known company fully ready to implement NG fueling stations in North America. Remember that NG burns cleaner than petrol, is hugely available all over North America ( CHEAP !! ) thanks to frac technology. With the copenhagen summit putting a lazer focus on North America and our way of life paradigm we can only expect that it is just a matter of time before we are expected to make a rapid change, it will and must happen. There really is no time left to debate our position.
    Life is about to change in a huge way for all North Americans, very clear. What we need are multi faceted solutions and we need them now. If we can not only reduce transportation consumption, emmissions and cost now by using NG, firstly for commercial applications then eventually, if that isn't enough on its own, for personal transportation use we may retain the liberties that the automobile has given us over the past 100 years. I personally do not believe that we will be able to save the suburban commuter lifestyle we have gotten used to…it simply doesn't work. Can you imagine what will happen if China continues it's surge towards the suburban mentality and personal vehicle ownerhsiup paradigm?!! Insanity….that is why we are at the forefront in Copenhagen. Don't think in decades, think in centuries…I know it's hard but that is what must be done. A lot of North American's are going to be very upset with the future in store for them. Feel free to strike up a conversation with me Jeff, I'd be honoured.

  • benisonstar

    I also would like to hear your viewpoint on what happens to the price of oil/b when the US dollar no longer is needed to purchase it.

  • marcovth
  • Andrew Walsh

    Hello there Jeff,

    I really enjoyed your book and watching the interviews. I am interested in your comments on Hamilton and the rust belt in one of the interviews.

    I can see how there could be several silver linings to a place like Hamilton – steel and manufacturing are still major contributors to its economy, as is agriculture. On the other hand, there seems to me to be some potential difficulties it would face with a potentially large increase in energy prices – its large bedroom community (commuters), its likely emphasis on a potential aerotropolis etc. I was wondering how you would picture all the factors netting out for such a place in terms of its future prosperity. Thanks

  • Claw1

    Jeff
    I read your book and thoroughly enjoyed the tone and practicality of your arguments. However, in the book natural gas only showed up as a hydrocarbon also in short supply, with no weight given to the shale gas contribution and the reserve explosion taking place in North American energy companies today. Just wondered if you had done any work on the potential impact of gas-to-liquids here in North America? From a high level, it looks like it would take between a 15:1 to 25:1 price differential to justify a GTL investment from an economic perspective, and we were at that earlier this year with $3 NYMEX gas & $75 WTI. I see in the post above that you mentioned liquified gas and the contraints on tank size, but made the comment that gas cannot be used as transportation fuel. What about converting nat gas into syngas and synthetic diesel to contribute to the transportation fuel shortage? Given your price forecast on oil, it would seem to me that this would become viable for the long term.
    Regards & Happy Holidays

  • Serge Lapointe

    Jeff, I'm sure you read in the news this week that Lukoil is claiming they will make Iraq the next Saudi Arabia with a target of 12 Million barrels a day within the next few years. As someone who has extensive knowledge of the oil situation in the world, do you believe this is an achieavable goal, this could keep the price of oil down if it works out.

  • tomzsolt

    In Toronto many cabs have converted from gasoline to Nat Gas. Why has this not occured more widely in Nat gas rich regions? Can this make a difference?

  • brad johnston

    While there are certainly some hurdles to using NatGas for transportation in place of oil, if the oil price is going to ~$200.00 it would seem some of these hurdles would be over-come and NatGas would be hard pressed to replace oil for transporation for 100% of application there would seem to be lot of opportunities for substitution in certain transportation applications

  • timhardfest

    I just purchased a fuel saving device which is a throttle body spacer. I have seen increased fuel efficiency and there are no outlandish claims from the maker.

  • http://www.xinmart.com/ R4-DSTT

    Natural gas CAN be used as a transport fuel

    Worldwide, there were 9.6 million natural gas vehicles in 2008
    http://en.wikipedia.org/wiki/Natural_gas_car

  • http://www.xinmart.com/ R4-DSTT

    Natural gas CAN be used as a transport fuel

    Worldwide, there were 9.6 million natural gas vehicles in 2008
    http://en.wikipedia.org/wiki/Natural_gas_car

copyright © 2009 Jeff Rubin. All rights reserved.