I am struck by how low the price of natural gas is.  The historic low prices are a victim of oversupply with under-demand and is a lesson about the economics of commodities. Here is a chart of the continuous natural gas contract (NG) price action over the last 10 years.  The 2005 peak was the result of the hurricane Katrina year where natural gas production was shut down and the U.S. quickly learned there was very little in the way of natural gas infrastructure workaround and distribution and redundancy.  (The 2008 peak in the chart was the oil bubble. )

Here is the same time span for the CL futures or oil.

Excepting for the peak in the 2005 pricing in natural gas, they mirror each other pretty closely. Currently natural gas is underperforming oil as it is hit by that double whammy of over-supply and decreasing demand.

The 2005 and 2008 price peaks increased the pressure for discovery and infrastructure improvements for the production of natural gas and those investments have paid off in better more economical distribution as well as the discovery and  tapping of more reserves.  The supply issues have been addressed.

The demand side however fell off as the result of the current economic softness. Since natural gas is priced in dollars and is homebrewed it does not have the same inverse relationship as oil has to the dollar. Currently our natural gas is not exported but as more LNG tankers come online the United States could once again be an energy exporting nation.  Japan, Korea and China have invested large amounts in exploiting natural gases via major infrastructure improvements.  South America has the largest fleets and installed filling stations for natural gas vehicles with over 48% of the automobiles running compressed natural gas.

We now have what is currently a BTU arbitrage.

The purpose of energy products is to exploit their BTU content (energy) for the manufacturing of goods or heat. Most of the energy from these products is used to produce steam for electricity, heat for our houses or to drive the engines in our cars, trucks, planes and trains. So which is the most dollar efficient?

Looking at the current price and the BTU content of each and comparing on a BTU to BTU basis produces the following chart:

Chart of BTU per dollar comparison of OIL vs.. Natural Gas vs.. Coal vs.. Electricity.

 
(pricing as of December 4th, 2009) 

Using Oil as the norm for the comparison it turns out that natural gas, when compared to oil on a BTU to BTU basis, is almost 3 times cheaper.  Coal (a little impracticable for cars) is 6 times cheaper!  Even electricity is a cheaper source of energy than oil. (The cost of electricity  is averaged across hydro, nuclear, natural gas, coal.. very little oil is used in the production of electricity).

If you want to profit from this arbitrage, switch your house over to natural gas if you have the option convert your cars to natural gas.  Our cities are already doing this for their public transportation.  Switching to natural gas has the added benefit of being cleaner for the environment (there is very little sulfur and other bad stuff in natural gas) and produces 1/3 the carbon emissions over oil.  The best reason of all? It is American made (along with Canada).

The largest use of natural gas in the United States is for the generation of electricity and for industrial production.  Paying attention to the weekly natural gas numbers is a good barometer on gauging the recovering strength of the American economy.

-RLT