Natural gas prices could be artificially low

With natural gas prices hovering around the lowest we’ve seen since 2002, it’s sure been cheap to heat this winter. My utility is buying natural gas for about 45¢ a therm (100,000 Btu). At that price, why bother to fire up a wood stove?

Why is gas so cheap? The recession has put a damper on consumption, but the main reason is that rising production from North American shale rock formations is overwhelming demand.

The New York Times describes it as “this century’s gold rush — for natural gas.” The shale gas is trapped underground in bubbles between thin layers of shale rock. Drilling companies have recently commercialized techniques to unlock reserves thought to be large enough to supply the United States for as much as a hundred years.

Chief among the techniques is hydraulic fracturing — “fracking” — where water mixed with sand and chemicals is injected underground at high pressures to break up rock formations and release the gas. Thousands of shale gas wells have come into production in the past few years, and, as you read this, hundreds of rigs are drilling more.

So for now, there’s a glut. April natural gas futures weighed in at about $4.17 for a million Btu, the amount of energy contained in about 8 gal of gasoline. My utility will deliver that amount to my house, tax included, for less than 10 bucks.

My high-efficiency furnace is still going strong, but the water heater is getting old. I was thinking of replacing it with a high-efficiency unit, but with gas so cheap, I can’t get excited about it, especially since reducing my consumption looks like it would just make gas producers more desperate to get rid of the stuff.

Apparently I’m not alone. For example, in February, trustees at Purdue University, home of the Boilermakers, voted to cancel a $53 million project to upgrade the Wade utility plant with clean coal technology. Instead, they plan to install a natural gas unit to replace the existing 50-year-old Boiler No. 1.

I’m sure hundreds of larger and smaller decisions are being similarly influenced. U.S. natural gas prices are down, and the outlook is for them to stay down even as oil and gasoline prices rise, at least for awhile. But for how long?

In Europe, natural gas prices still tend to rise with oil prices, and oil prices are going up. This is already encouraging U.S. gas suppliers to consider exporting U.S. natural gas overseas in search of higher returns. Many countries’ plans to review the role of nuclear power, announced following the effects of the March 11 tsunami on Japan’s Fukushima power plant, might increase natural gas demand. That $4.17 price for April is up from $3.80 in February, and up 7% in the week after the tsunami.

In the United States, where the greenhouse gas regulatory climate remains unclear, natural gas is now the default fuel for new power-generating capacity: Gas-fired plants are quick, cheap and short-term commitments compared to coal, nuclear or renewable sources. Meanwhile, U.S. natural gas companies already are tapering back on starting new wells. Concerns have been raised about environmental effects: a fracking well can produce more than a million gallons of wastewater containing corrosive salts, carcinogens such as benzene and radioactive elements such as radium, in addition to the fracking chemicals.

The wastewater is sometimes taken to sewage treatment plants, which are not designed to treat it, and then discharged into rivers that supply drinking water. Tests are being made, regulations are being written and equipment is available that is claimed to make fracking and its effluent safe, but by the time it’s sorted out, the practice may find itself legislated and NIMBY-ed out of contention. In any case, it’s likely to become significantly more expensive.

So I’d do my homework before I made any long-term assumptions about low-cost natural gas. Personally, unless it springs a leak, I’ll wait awhile before I replace my old water heater. But not for too long — I recently noticed a new condensing tankless unit that will serve our needs much better and use a lot less gas.