A Natural Gas-Powered Economy

There is an increasing amount of attention on the natural gas industry in the U.S.

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There is an increasing amount of attention on the natural gas industry in the U.S. As well there should be. The price of natural gas is currently very low while the price of crude oil is quite high. Throughout most of history, the ratio of the price of a standard crude oil contract to the price of a natural gas contract has been in the range of 10 to 1. This is because there is about eight to 10 times more energy per contract in crude oil than there is in natural gas. This 10 to 1 relationship between the two markets remained very consistent until about three years ago. Then the two markets diverged dramatically.

At the present time, the ratio between the price of the two contracts is more than 50 to 1! Put another way, at the current price for natural gas in the U.S., the price of oil should be less than $20 per barrel if oil and gas were perfect substitutes. Most cars do not burn natural gas, so obviously these commodities are not perfect substitutes. But my guess is that very soon this will change.

At the current price levels, it makes economic sense not only for many types of cars and trucks to convert to using natural gas as a fuel, but also all home heating systems that currently use heating oil should also convert to gas. And in the plastics industry, most resins that are currently made from crude oil-based derivatives will soon be made from gas-based derivatives.

The markets for electricity, motor vehicle fuel, heating fuel, and plastics resins are likely to all be based on the natural gas market in the not-too-distant future. This will push the price of gas up and at the same time it will pull the price of oil down, and the 10 to 1 ratio is likely to re-emerge in the coming years. This shift will represent many opportunities for U.S. manufacturers. And moldmakers who can take advantage of this shift at the early stages will have an advantage.


 

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