The North American natural gas industry is in the act of reinventing itself. Only recently, it had been a land-locked business that had to sell aggressively to locate customers because of its plentiful fuel. It’s increasingly becoming an international business that’ll continue to push itself to meet burgeoning demand. But that is no quick fix; it will require years for this transformation to be completed.
Exactly what a turnaround. Just 10 years ago, the Lion Gas Grills natural gas industry was entering the next decade of a supply surplus colloquially called the “Gas Bubble.” Oversupply meant chronically low prices. The price tag on delivered natural gas fell 42 percent in real terms from the mid 1980s to the mid 1990s–to $1.72 per thousand cubic feet by 1995–even though consumption had grown by 30 percent through that period.
These low prices put a into survival mode. In those times, producers who drilled a dried hole would claim that the bad news was that they didn’t find oil, but the good thing was that they didn’t find gas.
The late 1990s brought a series of changes that began the industry’s transformation. Natural gas began to become the fuel of choice in electric generation. Improved turbine technology increased the efficiency of gas-fired electric power plants, of also cheaper to build and–because of the environmental benefits of gas–easier to obtain approved than power plants which used other fuels. At the same time frame, gas was inexpensive and plentiful. In this climate, the electric power industry embarked on a significant building campaign, ultimately adding over 200 gigawatts of new gas-fired electric generating capacity, a 25 percent jump as a whole power capacity. But underlying this is a crucial assumption that natural gas would remain cheap and plentiful. More homes and businesses looked to natural gas for heating and cooking, as well.
Yet, even as the construction boom was entirely swing, the supply side of the started to undergo a dramatic change. By the late 1990s, 10 years of steadily rising production had whittled away the overhang of capacity. Supply, which have been chronically in surplus, was now just in balance with demand. Mild winters in 1997-98 and 1998-99 forestalled the inevitable price adjustment. However in 2000, a warm summer triggered surging prices nationwide and exacerbated a power crisis in California. Ever since then, industry has continued to tighten and prices have generally risen, reaching $8.80 per thousand cubic feet in hurricane-ravaged 2005, significantly more than five times the price of a decade earlier. A year of benign weather allowed prices to help ease to about $7.00 in early 2007–still well above the degrees of the 1990s. With the recent winter, they have bounced back.
Why have prices risen so much in the last decade? You can find two reasons. On the supply side, it’s geology. And on the demand side, it’s the growing importance of gas-fired power generation.