That Radical Decoupling of Gas and Oil Prices

Natural gas and oil normally trade in a well-defined range, but recent gas prices are sharply below the historic norm


Kurt Zenz House, a widely acclaimed research fellow at MIT, has a recent article drawing attention to the "curious oil and natural gas price differential." In the past 20 years, reports House, gas has sold at about two-thirds the price of oil, per unit energy. Since the beginning of this year, however, gas has been selling at around one quarter the price of oil. Of course that ratio fluctuates quite a bit on short time scales but rarely if ever as much as in the last year. "It is nearly impossible," says House, "to explain the current price anomaly between natural gas and oil with historical data. So, what's going on?"

House mentions prominently the discovery last year that the Marcellus Shale formation in the northeast United States has enormous recoverable reserves, using new horizontal drilling techniques. Because of such reassessments in light of new technology, estimated U.S. gas reserves are 40 percent higher than they were a few years ago. What's more, the exercise is being repeated everywhere, with similar results expected. “It’s a breakout play that is going to identify gigantic resources around the world,” energy expert Amy Myers Jaffe of Rice University told the New York Times. Cambridge Energy Research Associates guesses that because of gas shale, world reserves could be 50-160 percent higher than previously thought.

That's not all. As relayed recently in this space, BP has made an enormous oil and  gas discovery in the Gulf of Mexico, and three other top oil companies are reaching agreement on exploitation of Australia's gigantic Gorgon field. One of them, Royal Dutch Shell, announced last week it plans to build a floating liquefied natural gas facility, which it expects to use initially in two newly discovered fields northwest of Australia. Such "stranded" fields around Australia--too far from the coast or too sparse to warrant construction of pipelines to processing facilities on land--could contain as much as 140 trillion cubic feet of gas, according to an Australian government estimate cited in the Wall Street Journal. Much larger than a football or soccer field, Shell's floating LNG facility will be 480 meters long and 75 meters wide, and will weigh 600,000 metric tons. It will have the capacity to produce 3.5 million metric tons of LNG per year.

The most recent authoritative estimate of U.S. natural gas reserves, released last June, came from the Potential Gas Committee, a consortium of academic and industrial experts coordinated by the Colorado School of Mines. The committee boosted its end-2008 estimate of reserves to 1,836 trillion cubic feet—an increase of 45 percent from end-2006, and the largest increase in the 44 years the committee has been operating. When the committee's results were combined with the Department of Energy's "determination" of proven gas reserves (said the committee), the United States has a "total available future supply" of 2,074 trillion cubic feet, a 35 percent increase over the previous such evaluation.





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