Sunday, April 17, 2011

Shale Gas Production Stops Big Energy Shock

Is the USA on course for another big and broad energy shock that could make a shambles of our economy?  Are we seeing a repeat of the 2008 energy price explosion that saw oil reach a record $147 per barrel and natural gas hit $13 for a thousand cubic feet?

Oil has reached $123 at the Brent Benchmark and is being pushed up by record global demand.  Gasoline prices in the USA are $1 higher than a year ago, hurting median income families and businesses.

High oil prices are back and probably going to get worse.

But here is how the Marcellus and other shale production has so far helped to stop yet another crippling big energy shock and a replay of the energy horrors of 2008.

Thanks substantially to new shale gas production, America produced more gas in 2010 than in any year since 1973.  The new supply pushed down the price of natural gas by about 70% since 2008 to $4.20.

Since natural gas provides about 25% of our total energy needs, low and stable natural gas prices goes a long way to preventing a big and broad energy shock.

Natural gas heats 51% of our homes; it is a major industrial energy fuel; and provides 24% of our electric power.

Low, stable natural gas prices also now mean affordable electricity prices, since natural gas power plants are often on the margin or set the price of the overall wholesale electric market.  So unlike 2006 when retail electricity prices spiked 10% and 2008 when they went up 5%, electricity prices this year will increase about 2% and probably not at all next year.

Thank shale gas production specifically for keeping electric bills in check.

Oil prices are being driven up by record global demand, reaching $123 at the Brent market, nearing the record $147 set in July 2008.

As gasoline hits $3.82 per gallon on average across America, and with 5 states already above $4, families and businesses are experiencing real economic pain. Gasoline prices are about $1 higher per gallon than 1 year ago and that is costing a typical family about $750 per year.  Ouch.

The median income family has about $49,000 of pre-tax income so the $750 increase in gasoline costs hurts and represents easily 2% of lost purchasing power on after tax basis. These higher gasoline costs decrease purchases of other goods and services, destroy hundreds of thousands of jobs, and slow economic growth.  To make it worse, since we import 70% of oil, at current world oil prices, we are close to exporting $500 billion per year to foreign countries to buy their oil.

When will we break the oil addiction by subsidizing alternative fuel vehicles and massively deploying natural gas fueling stations and public electricity charging stations? Until we move to natural gas, electricity and biofuels for transportation fuels, relying on oil for 90% of transportation fueling will mean energy pain. Oil is dirtier and more expensive.  We are horribly addicted, indeed.

But unlike what happened as recently as 2008, the new natural gas shale production yields lower natural gas prices just when we need them, limits the damage done by our oil addiction, and prevents not another full energy shock.

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