Essay on Is Natural Gas Too Cheap to Drill?

Is Natural Gas Too Cheap to Drill?

Executive Summary

In his article ”˜Is Natural Gas Too Cheap to Drill?’ Mathew Phillips outlines the current situation in the U.S. natural gas industry and market, goes deeper into the background of the situation and offers several comments of the experts on the perspectives of the natural gas industry and market. The author states that natural gas price has seriously declined. The first reason he gives is that large amounts of shale gas have been unlocked by new horizontal fracking techniques. It caused natural gas rigs reduction in U.S. industry. Phillips (2012) claims that gas is too cheap and it is no longer profitable to drill it.

The author states that some analysts claim that the price is not the reason for gas production to be unprofitable. The profitability depends on the equipment. New horizontal rigs tend to retail production profitability even in case the price is lower than the current one.

However, Phillips (2012) states that natural gas producers continue their activity despite low prices. They try to expand volume of natural gas and to hold on to leases.

Craig Shere as cited in Phillips (2012) states that low prices for natural gas can be explained by the lack of demand which in its own turned has been caused by extremely warn winter weather. However, Craig Shere expects an increase of demand for natural gas from power sector particularly from power plants that are switching from coal to gas.

Furthermore, Shere as cited in Phillips (2012) expects that gas will supply more of the usual amount of electricity generated during the summer. As the production rates are low, the excess storage will spent very soon. Thus, the price for natural gas will rise.

Introduction

            Price is a complex economic category that should be considered in the context of a number of contributing factors. Price changes may influence an industry in a negative or positive way. Considering the perspectives of an industry, it is necessary to analyze the factors that affect the price of the product. Factors that affect price include the level of competition in the market, perceived value of the product, product development cost, various current economic trends, demographic factors and class of targeted customers. All the factors should be counted to consider the perspectives of an industry, while special emphasis should be put on the relationship of price and demand and demand and supply.

Is Natural Gas Too Cheap to Drill?

            There are several economic explanations to the situation in U.S. gas industry which has been outlined in the article. The reduction of prices for natural gas may be explained by the initial increase in the supply of natural gas. The author states that large amounts of shale gas have been unlocked. This situation provoked natural gas price reduction and as a consequence the number of producers declined as well. According to Adam (2009) as supply grows the price tends to drop. This tendency is demonstrated in the described situation. The number of producers decreased as it had become economically unprofitable to drill gas. However, Phillips (2009) emphasizes that some producers continued their activity based on more beneficial and economically reasonable technology ”“ horizontal rigs specialized in fracking. The technology allows retaining producers’ profitability. Another important factor which affected low price for natural gas is ”˜product development cost’ which tends to be rather high now and many of the producers experience hardships in their producing activity (Strategic Business Team, 2012). Thus, the supply decreased because of the decline of the number of producers. Wessels (2006, p. 37) explain the tendency in the law of supply. Producers that continue their activity in the natural gas industry rely on funding coming from equity markets and in the form of joint ventures. Their aim is to expand volumes and to hold on leases, while others try to hold acreage continuing their production, fulfilling contract obligations is another reason (The Oil Drum, 2012).  One more factor that the author gives as contributing into low price of natural gas in U.S. is the lack of demand which was caused by unusually warm weather in winter. Demand is a direct economic factor that influences price. In case demand is low the price drops as well (Sloman, 2009, p. 30). Phillips emphasizes that the lack of demand led to surplus storage of natural gas.

The author states that most analysts are sure that the prices for natural gas will remain depressed. However, there are opposite points of view. Shere as cited in Phillips (2012) expects the increase of prices for natural gas because of the rise of the demand for natural gas from power plants as he takes into consideration U.S. policy of switching power enterprise from coal to gas. One more factor that will contribute into the price increase for natural gas mentioned by Shere is high demand for natural gas in hot summer month when it is used to cover electricity needs. Thus, increase of demand for natural gas from power sector and electricity needs are the factors that will affect the price making it rise. It corresponds to the theory of the relationship between the price and the demand. In case the demand is high the price rises as well (Sloman, 2009, p. 30).

Conclusion

To sum up the discussion of natural gas industry perspective in the USA, it should be noted that current situation with low price for natural gas inside the country has been caused by three main factors. The first one is general increase in supply. The second factor may be seen as the lack of demand. And the third factor is high product development cost. Speaking about the perspectives of natural gas industry in the USA, most experts expect the prices for natural gas to be depressed until the end of the year. However, taking into consideration, U.S. common policy of power plants switching from coal to gas, we should expect the increase of demand for natural gas from power sector, while a large amount of natural gas will definitely be spent on electricity needs during hot summer. Thus the supply will be not so high. These factors should contribute into the increase of prices for natural gas in the nearest future.