Such is the state we now find ourselves in the market for natural gas in the United States. For the better part of the past decade, we have enjoyed historically low prices for natural gas fueled by a huge expansion of supply from hydraulic fracturing (fracking), notably in Northeast, the Southern Plains, and the West. Under normal circumstances, companies would limit how much they distribute of these resources to ensure long-term production and viability. However, when this technology started to produce, the market had three competitors that could scuttle any long-term adoption:
Cheap electricity from coal and nuclear.
Renewable energy technologies.
Energy efficiency.
In order to compete, and win, natural gas had to drop prices in order to create a challenging market for coal/nuclear, stave off investment in renewables, if possible, and keep demand as high as possible. And that they did: From 2006 to 2012, the price of natural gas dropped by 75%, with a number of ramifications.
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| US electricity generation by source (EIA) |
The timing of this drop could not have been better in the electricity marketplace where natural gas trailed coal and struggled to top nuclear. Coal plants that had avoided the necessary investments needed to comply with decades' old regulations were reaching the point where they had to upgrade. A large portion of the nuclear fleet was entering the timeframe where they needed to re-permit, and therefore make investments into the facilities. In order to justify these investments, the industry needed certainty about the level of energy prices they would receive. A glut of natural gas in the marketplace changed the economics, and coupled with a new ability for the EPA to regulate carbon emissions and a tragedy in Japan at Fukishima, coal and nuclear plants have started closing. Meanwhile, natural gas plants continue to come online. As a result, the share of electricity generated in the US from coal has dropped from 50% to about 35% over the past 15 years, while natural gas has doubled its position from 15% to 30%. Nuclear, after holding steady for the better part of the last two decades has started to decline.
Meanwhile, the US energy consumption per capita - which sits at twice that of nearly all of the developed world - that saw a significant downtick when the Great Recession hit in 2008, has now started to rebound. Instead of taking advantage of ridiculously low rates of borrowing to establish a solid foundation of low energy use on which we could rebuild our economy, we as a nation chose to cut back on investment and instead, put our stock in a hope that for the next two decades, prices for energy would remain low. Science and economics tell us that we are in for a rude awakening.
The fracking industry has sold the US that we have a large amount of extractable resource sitting under the US, that we can sustain this production for decades to come, and that natural gas does not harm the environment anywhere near as much as coal. All of these claims are starting to unravel. A recent EIA report drastically dropped the projected resources available in the Monterey shale deposit by 96%. Although directly related to the oil from fracking and not natural gas, this calls into question the estimates of economically attainable resources in other shale deposits. Along those lines, for the better part of the last five years, the industry itself has questioned the long-term economic viability of fracking. Fracking wells drop off production significantly in just two years, necessitating that industry build more and more wells to justify pipeline development and meet production goals. Meanwhile, the mantle of environmental benign-ness that the fracking industry touted against a small number of detractors ten years ago has crumbled as more and more research suggests that the environmental benefits lag while more and more issues result from the whole process of extracting fossil fuels from rock formations.
In order for the industry to continue its current rate of market penetration, it must continue the myth of environmental benefit, invest in more and more wells to get that boon of production from the first year, and build more infrastructure around natural gas so that high enough demand exists when prices will inevitably go up. That is the scheme on which investors have been sold in order to make it work: Keep investing in new wells now, even though they will not produce, because we can keep America hooked on gas.
The problem is, it's a lose-lose for the country.
If prices do not go up, then investors will lose money and back out in droves, drastically cutting supply and increasing the cost to the average American. If natural gas gains market dominance, then prices will do up to compete with larger profits to be gained from exports, and increase the cost to the average American.
The window is closing. Our last great hope is to reduce our dependence on all forms of energy, but especially fossil fuels, and increase the penetration of renewable energy into our electricity market. If we do that, we drop demand drastically, and introduce energy sources with much lower operating costs into the marketplace. These create downward pressure on prices, and provide us a measure of resiliency against future prices shocks.
If we do not make the necessary changes...well, we all know what happens to the people left standing when the pyramid scheme collapses.
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