Natural Gas…A Bridge to the Future

For some time, it has been our thesis that natural gas is an important “bridge” fuel.  It is relatively clean, cheap and abundant enough to satisfy the World’s incremental energy needs until such time that the infrastructure and technology progress adequately to allow renewable energy sources to satisfy a meaningful portion of energy demand.

Coal, while abundant, is simply too environmentally damaging and the citizens and regulators from China to the United States are demanding restrictions on its use and costly emissions upgrades to the aging coal infrastructure.  Nuclear seemed on the cusp of a global resurgence until the Fukushima disaster reminded us of the grave dangers associated with this power source.  In addition to Japan’s reassessment of using nuclear power, many countries like Germany and Italy have voted to ban the further nuclear power development and will soon begin closing existing plants.  The best near term solution to the World’s growing energy appetite is natural gas.

Fortunately, while the demand for natural gas is poised to accelerate, new drilling techniques have led to an abundance of natural gas in the United States.  In fact, the production of natural gas has been so prolific that spot natural gas prices (as measured at Henry Hub) have fallen nearly 50% since mid 2011 to about $2.00 per million BTUs.  A few years ago, as prices hovered above $8.00, these levels were unthinkable.  The unique thing about this situation is that it is a US phenomenon.  Natural gas prices are significantly higher in overseas markets for structural reasons – the commodity is not as easily moved around the world as oil.  This will probably change in a few years as the United States builds export capacity and the world builds shipping capacity.  But in the meantime, cheap US natural gas has profound investment implications.

Domestic chemical manufacturers have a distinct input cost advantage versus global competition.  US natural gas turbine manufacturers are seeing an influx of orders.  There are signs of a domestic manufacturing renaissance as foreign companies and US companies relocate manufacturing facilities back to the US to take advantage of cheap power.  Trucking companies are migrating their fleets from diesel fuelled to natural gas fuelled vehicles to realize the significant savings afforded by the commodity price differential.  Environmentally unfriendly coal-fired power plants are being retired at a faster pace as natural gas fired replacements are built.

Perhaps this will take the US a step closer towards energy independence.  At least it will lead to a tailwind for the domestic economy.  And a cleaner economy.