Shale gas may be the energy of the future

Advocates of traditional energy sources (such as oil, natural gas, and coal) and backers of renewable energy sources (such as solar, wind, and geothermal) are frequently at odds. But there is one energy source they may have a meeting of the minds on: shale gas.

Although technically still a traditional energy source, shale gas has three qualities supporting its development: it's cleaner than coal, the supply is plentiful, and it is a domestic energy source.

And in an energy challenged, climate conscious world, shale gas, along with conventional natural gas, looms as a potential, major energy source for the U.S, particularly for electric power plants that want to meet tougher emissions standards, and for homes and businesses currently heating by oil that want to lower their heating bills.

Major future energy source?

Shale gas's liability? It costs more to extract that conventional natural gas, due to the hydraulic fracturing and sideways drilling that's used to release and obtain the gas that's trapped in nonporous rock.

Hence, a sustained collapse in the price of oil below $40 per barrel will keep much of that shale gas underground; but don't look for that to happen to crude oil any time soon.

How much must the price of natural rise to make shale gas profitable? Bernstein Research said natural gas needs to rise to $7.50 per million Btus to generate enough production to meet demand, also called the marginal cost of supply, Bloomberg News reported Monday. Bernstein estimates that natural gas prices will more than double to $9-10 per million Btus by the end of 2009, enabling greater production of the shale gas.

If natural gas rises to that level it will mark an eye-opening -- and an investor-assisting -- turnaround for natural gas. Natural gas traded Monday afternoon down 14 cents to $3.73 per MBtus. During the frenzy of the leveraging boom in 2008, natural gas prices soared to $13.69 per million Btus, only to see the price collapse with the onset of the U.S. and global recessions, and consequent falling demand for energy: prices hit a low of $3.15 per million Btus in April.

Shale natural gas has (at least for now) another positive: it's cheaper than oil, on an energy output delivered basis. Moreover, although the two energy sources compete with each other, their supply / demand characteristics are not identical, and that helps cause price divergences. Further, natural gas production and consumption is very local, and is hence more-sensitive to local demand conditions. Conversely, oil, as most investors known, is sent half-way around the world and its price is affected by global supply and demand factors, not merely regional ones.

With a price around $68 per barrel, oil is about 18 times the price of natural gas, compared to a historical average of about 8.4 times natural gas over the past decade. As investors might sense, history suggests that gap will narrow, as a result of a drop in oil's price, a rise in natural gas, or both. With the U.S. economy showing signs of a recovery, and with few signs of softening oil prices, it appears that natural gas prices will trend upward in the quarters ahead, enabling increased production of shale gas.

Energy Analysis: The recession that closed factories and power plants really hurt the price of natural gas, decreasing production of the more costly shale natural gas; but that trend appears to be reversing now. Hence, it behooves the U.S. to move toward increased use of its plentiful, domestic natural gas as a substitute for oil, where possible (in power plants, homes, offices, buses and large vehicle fleets, etc.). For power plants, natural gas is a cleaner energy source than coal, and equally important, much of the natural gas supply is home-based: it represents energy dollars re-circulating in the American economy – not a wealth transfer to foreign governments for imported oil.
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