2012 Natural Gas Prices Going Still Lower & 6 Big Things It Means

Natural gas prices are going lower in 2012 than they were in 2011, posing 2 questions:  What are the 6 Biggest Results of still lower gas prices in 2012? Where is the floor for natural gas prices?

In 2008, when daily spot prices hit as much as $13 during the summer, many would have said that $6 for a thousand cubic feet was the absolute floor.  Those days were before the shale gas boom, when shale gas was just beginning to ramp up production and still accounted for less than 5% of total gas supply, as compared to 34% of all gas supply today.

The shale gas boom has made $6 natural gas probably the new ceiling on prices and not the floor.  So just where is the floor?

More recently many would have said the floor for gas pricing is $4, the annual average spot price for all of 2011.  The 2011 price was 9% lower than in 2010 and the second lowest average annual price since 2002.

Yet, in its Short-term Energy Outlook, EIA projects that the average annual spot price for gas in 2012 will be $3.53 or about 12% lower than in 2011. See page 7 at www.eia.gov/forecasts/steo/pdf/steo_full.pdf.

How good is the EIA forecast and how would it shape 2012 if accurate? Last year EIA nailed just about to the penny its forecast of the 2011 annual average spot price, when it forecast a $4.02 price and the annual price ended up at $4.  And if the first two weeks of January 2012 are indicative, when spot prices have often been under $3, the EIA 2012 forecast may just err on the side of being high, even though the $3.53 projected price is low, low, low.

Down, down, down go natural gas prices as shale gas production goes up, up, up. Gas demand is increasing, with more than half of the increased demand attributed to  more gas displacing coal to make electricity.  EIA states, "Increases in the consumption of natural gas for power generation are likely to continue as domestic production continues to grow and natural gas remains a relatively inexpensive option for generators."  Despite the rising use of gas to generate power, demand for gas has not kept pace with supply increases. Hence the $3.53 2012 projected price.

Here are 6 Big Results of $3.53 natural gas in 2012:

1. Still lower natural gas bills for consumers, with a residential consumer saving probably another $45 on top of the approximately $500 per year the gas price drop from 2008 has already provide.

2. Still lower electricity bills for those consumers in competitive electricity markets where natural gas pricing importantly impacts electricity prices.  All other things being equal, another 50 cent decline in gas prices could reduce electricity bills by about 0.5 cents per kilowatt-hour and save electricity consumers about $50 during 2012. This $50 saving would be added to $500 per year in electricity costs that lower natural gas prices have already provided.

3. Lower natural gas bills and electricity bills will again prevent a broad energy shock, even though oil prices are at record levels for a full year and would go much higher if conflict with Iran erupts.

4. Another decline in the number of producing shallow, traditional gas wells in Pennsylvania will take place.  Pennsylvania had 57,000 producing gas wells in 2009; 44,000 in 2010; and will have still less in 2011 and 2012, as low natural gas prices lead producers to shut-in marginal shallow gas wells.  These wells cumulatively provide probably less than 150 billion cubic feet of gas per year, a small percentage of the more than 1 trillion cubic feet that Pennsylvania will produce in 2012, as Marcellus well production increases will more than compensate for reductions from shallow gas wells.

5. Gas will continue to displace coal in electricity generation.  Power plants that can run on either coal or gas will use gas. More decisions will be made to convert coal plants to gas. Gas's electricity generation market share will rise and coal's fall to below 43%, into the 42% zone.

6. More natural gas displacing coal and oil will cut carbon emissions and other pollutants like soot and mercury.  US carbon emissions will likely fall in 2012, in significant part due to natural gas.

The 2012 pricing may well be the new floor on gas pricing.  It is really hard to see how prices can go any lower, given that gas demand is rising, more drilling rigs are moving to oil, and prices are so low that more marginal wells are being shut in.  EIA itself is forecasting an increase in gas prices for 2013 to $4.14, up but sill low.

Finally, perhaps another year of record gas supplies and establishing a new floor on gas prices will mean that the ridiculous smear that shale gas is a "Ponzi Scheme" and those that spread it will be ridiculed by one and all in 2012.  I am not counting on that one, but another year of low, low natural gas prices looks almost guaranteed.