ANALYSIS: As Fuel Boom Hits US, American Consumers May Not See Lower Costs
The U.S. is awash in newfound petroleum and natural gas brought about by oilfield drilling technologies that promise to make the nation energy-self-sufficient within the next few years.
Just don’t expect cheaper gasoline, diesel fuel, natural gas, propane, heating oil or any other fossil fuel-based products as a result.
Even as the nation’s access to fossil fuel resources grows, American consumers are competing with nearly everyone else on the planet for energy. That energy – even what is developed at home – tends to go wherever in the world the money is.
“Price, in this free market system, allocates supply. It goes to the highest bidder,” said Jim Ritterbusch, president of Ritterbusch & Associates, an oil trading and advisory firm in Chicago. “Like everything in economics, it’s a moving target. It’s constantly shifting.”
About the only thing industry-watchers agree on is that America’s new petroleum supplies will likely bring about a period of stability in energy markets. “We’re going to see much more stability than we have seen in the last 25 years,” Ritterbusch said.
In a country where petroleum touches nearly everything, that stability is welcome.
“The good news for the economy as a whole is that we are headed closer to break-even in terms of net energy imports and exports. This should bolster the dollar and ward off inflation,” Ethan Bellamy, a petroleum market analyst for Robert W. Baird & Co., said in an email.
“Unfortunately, this bigger-picture macroeconomic concept will be lost on fuel consumers, who only see what they pay at the pump,” he said.
It might be lost, too, on people who had to buy propane this winter or who opened their heating bills and nearly fell over.
For those who heat with natural gas, it could be worse.
The price of natural gas paid by consumers elsewhere in the world remains higher than it is in North America, thanks to the shale gas revolution, said Gale Klappa, head of Wisconsin Energy Corp., Wisconsin’s largest electric and gas utility.
Shale gas is natural gas that is found within shale rock formations. Shale gas production in the United States has gone from virtually nothing in 2000 to more than 25.7 billion cubic feet per day in 2012, according to the U.S. Energy Information Administration.
“The price in Europe is still more than double what customers are paying here in the U.S.,” Klappa said.
Those prices will eventually catch up to each other, he said.
“Markets tend to be global these days, so when you see a price differential like that, eventually, over time, those price differentials will narrow,” Klappa said.
Demand for natural gas also is expected to grow, whether from increased use for electricity generation or for truck fleets.
And, like just about every type of petroleum product in the U.S., exports of natural gas also are expected to grow.
Dominion Resources Inc., of Richmond, Va., which shuttered its Kewaunee, Wis., nuclear power plant in May 2013, is focusing its investment dollars on a $3.8 billion natural gas export terminal off the coast of Virginia.
Analysts say the U.S. will export more natural gas than it consumes as soon as 2016 or 2017.
“To a great extent, analysts also believe there’s still sufficient supply to meet both the demands for the U.S. as well as what we want to export,” said Valerie Wood, who follows the natural gas market for Energy Solutions Inc., of Verona, Wis.
In some parts of the country, there is so much natural gas that producers burn it to get rid of it.
Oil producers in North Dakota, for example, burn off natural gas, because oil is more profitable and the infrastructure to handle natural gas has not kept pace with the rapid development of oil production in the state.
“With natural gas, there is a very robust storage market and dense pipeline infrastructure in the U.S. that allows us to have adequate supply during cold winters,” Kenneth B. Medlock III, senior director of the Center for Energy Studies at Rice University in Houston, said in an email.
When it turns bitterly cold, as it has this winter, the ability to deliver natural gas to particular markets becomes stressed due to limited pipeline capacity, Medlock said. When that happens, the price in the affected markets soars. But that is usually a short-lived situation that resolves itself once the weather starts behaving normally.
This year could cause a shift in the conventional wisdom on natural gas prices, Wood said.
Many thought natural gas exports would not cause a meaningful increase in prices. That may change after the price of natural gas spiked in early January, escalating to a four-year high in the northeastern United States during the first Arctic blast.
“Most don’t think it’s going to be as significant an issue on pricing,” Wood said. “At the same time, that could be rethought now after this major run-up, because we haven’t had a major price run-up since 2010. The market’s been very stable.”
The bitterly cold winter has brought speculators back into the trading of natural gas futures. Price volatility, including a 10 percent jump in one day in the price of natural gas futures, also has returned to the market.
So could natural gas experience the same sort of crisis that hit propane this winter?
Prices for propane have soared to their highest point ever, after supplies ran short and demand soared during the coldest winter in at least 30 years.
Exports played a role, no doubt, but the primary causes of the propane problems were the weather and supply disruptions, said propane expert Anne Keller, manager of NGL research at Wood Mackenzie, a consulting firm in Houston.
“When we were hit with the big winter chill, the fact that those exports had already occurred in December just made a bad situation worse,” she said.
Propane isn’t something oil companies are seeking when they drill a well. It comes as a byproduct of drilling for other products, such as oil or natural gas, and then needs a place to go.
In summer, when crops don’t need drying and when weather is warm, that means exports, Keller said.
The problem is sorting out the seasonality of demand, she said, “and I don’t think we’ve drilled down enough on that.”
Could the same thing happen with natural gas?
“Propane is not delivered via a pipeline network all the way to end-user, and it is not as deep a market as natural gas,” Medlock said. “This raises the possibility for (propane) supply disruptions, because the physical market is not as liquid for propane as it is for natural gas.”
Meanwhile, there is growing consensus that the U.S. will soon begin allowing the export of crude oil, which has been banned since the oil-supply shocks of the 1970s.
That only complicates an energy marketplace that has been turned on its head.
“That will be the big story this year and next,” Ritterbusch said. “A lot of countries that have excess refining capacity will be wanting to buy our crude.”
Right now, the U.S. is exporting huge amounts of refined products, especially diesel fuel. Ritterbusch says the exports are adding 10 to 15 cents a gallon to the price of diesel fuel.
If the ban on crude exports is lifted, companies would likely export crude instead of the refined fuel products.
So, should the government step in and regulate all of this?
Absolutely not, market experts say. One of the major reasons we have this newfound petroleum resource is that independent U.S. producers were allowed to tap what was in the ground.
“Ask Argentinians how well protectionist trade policies work,” Bellamy said. An oil- and natural-gas-rich country, Argentina’s economy has been in disarray for more than a decade.
“What we need is strong energy and economic interdependence with our friends and allies to promote global peace and prosperity,” Bellamy added. “Keep the trade restrictions and other communist command-and-control tools in the history books where they belong.”
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