Natural Gas Futures Continue to Fall, Big Implications for Manufacturers and Consumers

Natural gas futures fell to their lowest levels in over two years on January 11th. The implications for factories, homeowners, and manufacturers are incredibly significant. And according to an instructive article in yesterday's Wall Street Journal, prices are expected to stay low for the immediate future as hydraulic fracturing and a generally mild winter has created a glut in natural gas supplies. 

At a hearing before the Senate Energy and Natural Resources Committee in 2005, I distinctly remember startling testimony from Mr. Andrew Liveris, the CEO of Dow Chemical Company, regarding the stark future of natural gas prices in the U.S. The previous year, Dow had to shed nearly 14 percent of its workforce (some 7,000 jobs) due, in part, to prohibitively high energy costs. Liveris said, "This [natural gas] price of $14, simply put, renders the entire U.S. chemical industry uncompetitive. We simply cannot compete with the rest of the world at these prices. When faced with a choice of investing in the United States at $14 gas versus $2 to $3 elsewhere, how can I recommend investing here?" On Wednesday, natural gas futures fell to $2.77 at the New York Mercantile Exchange for delivery next month - talk about an amazing chain of events!

Fueling this incredible drop in prices in natural gas has been the incredible production ramp-up from hydraulic fracturing. Since 2000, natural gas production from shale formations has increased 17-fold. According to the aboved Wall Street Journal article, many financial analysts expect prices to remain low for the immediate future because companies are locked into leasing agreements forcing them to continue drilling and the underlying shale formations also contain crude oil (currently trading at $100/barrel) and very valuable natural gas liquids (NGLs). The Energy Information Administration predicts that homes in the Northeast can expect to pay over $1,000 less this winter to heat their homes with natural gas versus home heating oil. Often overlooked in the supply boom is the growing abundance of NGLs in shale formations, that are a boon for the chemical and plastics industry as well as refiners to boost octane in gasoline blends. US manufacturers now enjoy cheaper natural gas prices than China, and some industry analysts are suggesting that it's increasing domestic competitiveness and bringing jobs back to a very hard-hit sector. Despite the boom in production, there is a shortage of pipeline capacity to move all the natural gas that's being produced. For operations with stranded production, many must "flare" or burn off excess natural gas that raises environmental concerns because of increased ozone and carbon dioxide emissions. States will likely grapple with the challenges and scrutiny increased pipeline construction will bring to meet growing future energy demands, and air quality issues that come with energy development.