Natural Gas: Don’t Bet on It

By John Maniscalco

February 17, 2012

The natural gas industry has spent tens of millions of dollars trying to convince consumers that their product is the proverbial “silver bullet” that will save them thousands of dollars in home heating costs for years to come, if only they would switch fuels. But like almost everything else in life, if it sounds too good to be true, it probably is—and the fact is, when it comes to natural gas if you scratch the surface of the industry rhetoric, it becomes abundantly clear that switching to natural gas is a sucker’s bet.

The natural gas industry bases its claim of savings on the fact that natural gas prices are at record lows, driven down by the development of a controversial drilling technique called hydraulic fracturing, or “fracking,” as it has come to be known in the parlance of our times. The industry maintains that the widespread use of fracking has vastly increased our nation’s reserves of natural gas, although that assertion has come into question by no less an authority than the federal Energy Information Administration (EIA), which recently issued a report stating that those claims may have been, to put it charitably, dramatically overstated.

That said though, let us agree that the industry’s estimate is at least in the ballpark. The fact remains that the cost of converting a home heating system to natural gas can run as much as $10,000 or more, an investment that the industry maintains can be amortized relatively quickly by the savings that can be achieved by switching fuels.

Unfortunately, the notion that the cost of switching to natural gas can be quickly recovered is based on the assumption that natural gas prices will remain where they are—and the fact is, that is simply not the case.

History shows that the price of fossil fuels track one another fairly closely. When the price of oil climbs, the price of natural gas closes the gap; likewise, when the price of natural gas goes up, the price of oil follows, prodded by the invisible hand of the free market.

Indeed, a confluence of circumstances is already taking shape that virtually guarantees that the price of natural gas will increase in both the short term and the long run. As one market analyst said recently, “the surest route to $8 gas is for everybody to plan on $4 gas.”

With the price of gas at a historic low, major industrial users such as power plants, are converting from coal to natural gas. According to data obtained from the EIA, natural gas use for power generation rose 7 percent between 2009 and 2010, and those numbers continue to climb.

At the same time, the natural gas companies are moving to export large quantities of natural gas overseas to Europe and Japan where natural gas commands a higher price. The federal Department of Energy is currently considering applications from American natural gas companies that would allow them to export as much as 16 billion cubic feet of natural gas per day.

Should these permits be granted, the EIA estimates that the average consumer’s gas bill would increase substantially, depending on how much of the commodity is actually exported.

And, as if that weren’t enough, the natural gas companies are also moving to cut production in an effort to drive prices upward. The Wall Street Journal recently reported that the Chesapeake Energy Corp., the nation’s second-largest producer of natural gas, announced that it would cut daily production by eight percent. The paper noted that, “the move is designed to reduce the glut of natural gas in the U.S., and therefore increase prices.”

Like Bob Dylan once said, you don’t need a weatherman to tell which way the wind blows, and in this case, the wind is clearly pushing natural gas prices upward as the industry moves to restrict supply in the face of increased demand from both the domestic industrial sector, and foreign markets willing to pay higher prices. Given those conditions, the industry’s claims that an expensive conversion to natural gas will quickly pay for itself is revealed for what it is—a bunch of hot air—and the message is clear; don’t believe the hype.

Co-Signatories:

Thomas Tubman, Executive Director, American Energy Coalition

Michael Ferrante, President, Massachusetts Oilheat Council

Kevin Rooney, CEO, Oil Heat Institute of Long Island

Matt Cota, Executive Director, Vermont Fuel Dealers Association

Michael Trunzo, President & CEO, New England Fuel Institute

Eric DeGesero, Executive Vice President, Fuel Merchants Association of New Jersey

Gene Guilford, Executive Director & CEO, Independent Connecticut Petroleum Association

Thomas Peters, CEO, Empire State Petroleum Association

George McQueeney, President, National Association of Oil & Energy Service Professionals

Jamie Py, President, Maine Energy Marketers Association

Roy Patterson, Executive Director, Delaware Valley Oil Heat Council

Julie Gill, Executive Director/CEO, Oil Heat Institute of Rhode Island

John V. Kulik, Executive Vice President, Pennsylvania Petroleum Marketers and Convenience Store Association

John Maniscalco is the chief executive officer of the New York Oil Heating Association (NYOHA). NYOHA, established in 1939, is an association primarily comprising family-owned heating oil distributors and terminal operators serving the City of New York’s five boroughs and the surrounding counties of Nassau and Westchester.