NATURAL GAS vs CRUDE OIL....Supplements??

According to a recent article in the WSJ (see link below), we are witnessing a phenomenon in the energy market of crude oil and natural gas. It states that the price for natural gas has fallen 79% from its high in the summer of 2008 and that gas has fallen significantly less, thus, creating a historic price gap between the two energy sources where the price of oil is nearly 37 times the price of natural gas.

Because oil and gas fulfill the same fundamental purpose, that of an energy source, consumers and business will begin changing behavior if the price gap continues over the long-run. In the short-run, the upfront costs of switching from oil to natural gas might be too expensive to justify, but in the long-run consumers and businesses will begin replacing worn-out equipment with a natural gas equivalents, worn-out automobiles with natural gas equivalents, and other worn-out durable goods with natural gas equivalents. As these businesses and consumers makes such changes, the demand curve for natural gas will shift out (right) representing their increased demand for natural gas at all prices, and the demand curve for oil will shift in (left) representing their decreased demand for oil at all prices. As the two markets adjust to the change in demand, eventually their prices will drift back to the historic equilibrium of the price of oil being "6 to 12 times more...than natural gas."

I know you will all be watching closely to see if and when it becomes economically reasonable to convert your cars and trucks to operate on natural gas.



Adam said...

I liked your post on natural gas mainly because my wife and I were thinking about having one of our cars converted to natural gas. Some of our friends have already done so and they are always talking about how cheap it is to fuel up their cars. I thought that it would probably be a good idea, but I also realized that it’s pretty expensive to install a system. Plus as natural gas gets more and more popular, it will become more and more expensive because demand will have increased substantially. In the short-run this might be a good investment, but in the long-run, I don’t know if the substantial installation costs are worth the money when the price of natural gas comes to rival that of the usual stuff.

Evan said...

I was going to try to refute your post by stating that the oil companies would not allow the natural gas companies to take over the energy industry. Big oil rules the world after all. I was going to state that the competitive nature of the oil companies would dismantle the natural gas companies.

Upon researching the issue though I found out that the oil companies are also the natural gas companies! According to www.petrostrategies.org/Links/worlds_largest_oil_and_gas_companies.htmthe companies that own the worlds largest oil reserves also own the worlds largest natural gas reserves.

I am a fan of natural gas and I hope that your assessment of the fizzling out of oil due to the increased demand of natural gas comes to fruition.

Robert said...

I think that this article is a perfect economics lesson. Basically people follow profit or savings until so many people catch onto the good deal that it becomes a wash. I agree, in the short-term natural gas will advantageous. However, there are several negative sides to using this alternative fuel. The tanks are bulky and take up a lot of room, you can never fill the tank completely, and the number of service stations that provide natural gas is limited. In addition, the fuel is compressed and takes a long time to fill the tank if a number of people have filled before you get to the gas station. You just have to fill up more frequently, but it is really cheap because Utah actually subsidizes natural gas. Hope they never change that.

Dr. Tufte said...

The Young's is not an acceptable pseudonym: change it. I'd also like to see your link cleaned up.

Interestingly, oil and natural gas prices don't arbitrage away very readily. The reason is the difficulty of storing gas, and of shipping it across water.

Having said that, markets are moving to make natural gas more transportable - but for the foreseeable future, that effect won't be strong enough to create decent arbitrage.

Adam: Robert brought up some interesting points about opportunity costs of LNG, and also about subsidization within Utah.