Natural Gas Conundrum

Natural gas prices are extremely low, yet gas prices are hitting new highs in the U.S. The core of Obama’s energy independence strategy is to utilize natural gas as a source of fuel for vehicles. But the problem is that natural gas prices are so low, no one really wants to drill for natural gas. Further, production decline rates on well that use fracking are exceptionally rapid. When you combine these two factors, according to Testosterone Pit, we go from glut to shortage in the blink of an eye.

So these noble ideas of how dirt-cheap natural gas will perform miracles, as ballyhooed by the White House, will smack into reality: at current prices, drilling activity will continue to shrink while production at wells drilled over the last two years is plunging. At some point, the massive amount of gas in storage will be drawn down below a normal level. But production can’t be cranked up from one week to the next. Perceived or real shortages will drive up the price, but not to an equilibrium where producers barely break even and consumers enjoy low-cost energy. It will be a spike. We’ve been through this before.

Meanwhile, Republicans are trying to tar President Obama with gasoline prices that have gone the opposite way. The strategy is working. Obama’s approval rating on handling gas prices has plunged. In San Francisco, gas is already $4.50. Yet across the Bay are five oil refineries that together are the largest exporters of petroleum products in the nation.