Rising natural gas prices: A benefit for efficiency or drilling?

The growth in hydraulic fracturing, especially over the last decade, has fueled a sharp shift in the availability of natural gas.  These increasing supplies have resulted in maintaining downward pressure on natural gas prices.

The Great Recession certainly created a market with depressed demand, also a factor in low prices.  But since 2008, the price of natural gas has only tracked the overall heating demand of the country, essentially decoupling it from economic parameters.

That creates a scenario whereby today's news of sharp increase in the price of February futures for natural gas to $5 could present a reason for concern.  Not only does the US economy depend on some relative stability in energy prices (and with an increase in the use of natural gas to create electricity, these markets are more coupled than ever), but the return on investment made in drilling operations depends on a minimum level of performance to keep capital flowing.  Increasing that return drives more investment, then more production, then more utilization, then more damage.

After 2010, amidst continued economic turbulence in Europe and a still sluggish US economy, this relatively high price (at least in the "new normal" following 2008) for February did not result in a trend upward because demand remained relatively low for the next two years.  With this year's predicted heating demand comparable to 2011, and prices still climbing, we could finally see an increase in non-heating market demand driving price growth.  That could lead to a return to the $10+ natural gas of mid-last decade as electricity and liquified natural gas production puts demand pressure on the market.

An increase to $10+ would certainly have a draining effect on the economy.  It would also produce increased incentive for more drilling, adding to the cycle of dependence.  Even with the increased incentive for energy efficiency, the increased investment will drive an increase in supply, and eventually reset the market at a new acceptable level.  The only way to break this cycle is to move to a culture of low demand.  During times of low commodity costs, we need to drive and incentivize investments in efficiency.  At the same time, we need to accelerate the requirement that new buildings and processes require no external source of energy.  Both of these requirements are cost positive to the economy both in the short- and long-term.  In addition, they provide a resiliency and risk aversion that commodity fuels like natural gas cannot provide.

Energy prices grab all the headlines, but in terms of economics and quality of life, a steady path of efficiency and resiliency presents the best option.  We certainly need to respond to the short-term impacts of energy use, but in the end, our best strategy should focus on taking energy as a commodity out of the equation altogether.