Gregor Macdonald submits:
A barrel of oil contains 5.8 million BTU and can be purchased today for $77.00. But in natural gas, using today’s price of $4.80 per million BTU, you can obtain the same quantity of energy for $27.85. This price discount started developing as far back as 2005, but did not reach its current levels until after the deflationary crash of 2008. Natural gas, it should be mentioned, had always carried a small discount to oil owing to the latter’s versatility as a liquid and its greater penetration into industrial society. The present day discount is historic however. Especially with respect to its duration.
There are a number of factors at play here. First, North American natural gas supply is trapped, as no export facility exists to ship LNG to the rest of the world. (This will change when the Kitimat LNG project comes on line circa 2013). Accordingly, North American natural gas sells at a persistent discount to global volumes of LNG. Second, North America is a heavy user of oil-based transport but as a continent we are really defined by our remaining coal and natural gas resources–not our depleted crude oil resources. Finally, the 6 straight years in which global oil production has remained flat to declining reflects sturdy, structural changes that are now embedded in the price of oil. Accordingly, because the price spread is so enormous, a number of analysts think that the price of natural gas will eventually catch up again, to oil. And possibly soon. Not only do I think otherwise, but I think it could take a decade or more for the BTU in natural gas to price once again near the BTU in oil. If ever.
