90-year supply of natural gas at current consumption rate

From MIT Technology Review (click here):

Experts now believe that the country has far more natural gas at its disposal than anyone thought three or four years ago. The revised estimates are largely due to advanced drilling techniques that make it economically feasible to extract the fuel from shale. And while the Marcellus is the most recently discovered and possibly the largest shale-gas deposit (covers PA, NY, VA and OH), others are scattered throughout the country.

The U.S. consumes about 23 trillion cubic feet (TCF) of natural gas a year, according to the Department of Energy's Energy Information Agency (EIA). The Potential Gas Committee (PGC), an organization headquartered at the Colorado School of Mines, put the country's potential natural-gas resources at 1,836 TCF in a biennial assessment released in June. That's 39% higher than its estimate of two years earlier. Add to that the 238 TCF that the EIA has calculated in "proved reserves" (the gas that can be produced given existing economic conditions) and the PGC pegs the future supply at 2,074 TCF.

In other words, there is enough natural gas to supply the country for 90 years at current consumption rates. Even if we used natural gas to totally replace coal in generating electricity, domestic supplies would last for 50 years.

Natural gas offers advantages over other fossil fuels. It burns cleaner than coal, producing much less carbon dioxide. Since coal-fired power generation is responsible for a third of U.S. carbon dioxide emissions, replacing at least some of that coal with gas could significantly reduce such pollution. And using natural gas to replace gasoline and diesel fuel in vehicles could reduce the country's reliance on foreign oil.

"It doesn't matter what the exact number is," says Mark Zoback, a professor of geophysics at Stanford University. "The numbers are all so big it means we have an extremely large domestic resource that is going to play a significant role in the country's energy future."

The availability of vast natural-gas resources in the Marcellus shale and similar sediments around the United States has changed energy calculations in a fundamental way. The discovery of this large and seemingly economical new source of fossil fuel has surprised even geologists who have spent their careers studying the shale. Little wonder, then, that policy makers and politicians are just beginning to try to figure out what the discoveries mean.

Latest energy outlook report released

According to the early release of the Energy Information Administration’s (EIA) Annual Energy Outlook 2009 (AEO2009), the latest projections expect virtually no growth in U.S. oil consumption for the first time in more than 20 years.

EIA said that the combination of recently enacted CAFE standards, requirements for increased use of renewable fuels, and an assumed rebound in oil prices as the world economy recovers will reduce oil consumption. U.S. net dependence on imported liquids will decline dramatically over the next 20 years as the use of biofuels is expected to grow.

After averaging $101.46 in 2008, EIA projects a barrel of crude oil to average $63.53 in 2009, $82.09 in 2010, $91.59 in 2011 and $102.52 in 2012. In fact, after a nearly $40 drop in price projected for this year, it does not predict it will fall year-over-year again through 2030, the date the projections end.

EIA projects a sharp increase in the sale of unconventional vehicle technologies such as flex-fuel, hybrid and diesel vehicles, with plug-in hybrid vehicle (PHEV) sales projected to grow to 90,000 vehicles annually by 2014. In addition, they expect ethanol use for gasoline blending to increase to 12.2 billion gallons and E85 consumption to rise to 17.3 billion gallons in 2030.

Total number of miles traveled by freight trucks is expected to decrease slightly in 2009, EIA said, falling from 231 billion miles driven in 2008 to 226 billion miles in 2009, before increasing to 232 billion in 2010 and 244 billion in 2011.

Gas Price Update

National Average: $1.89 (lowest price since February 2005)
National Low: $1.35 in Kansas City

Mark Perry estimates the annualized savings to be $317.4 billion, based on the drop in gas prices from the peak of $4.12 per gallon in July to the current $1.89 ($1.4235 billion annual savings for American consumers and businesses per penny decrease in gas prices, see calculations here).

Falling gas prices act almost like a tax cut

According to the most recent data from the Federal Highway Administration, the total traffic volume over the most recent 12-month period (through July 2008) was 2.944 trillion miles. According to data from the EIA, the average fuel efficiency for all vehicles in 2006 (most recent year reported) was 17.2 miles per gallon. That means that the amount of gasoline required for the traffic volume over the most recent 12-month period was 171,216,860,465 gallons (2.944 trillion miles driven divided by 17.2 miles per gallon).

Therefore, every penny decrease in the price of a gallon of gas would equal more than $1.71 billion in consumer savings over a year (171.216 billions of gallons X $0.01). In that case, the $1.10 per gallon decrease in gas prices from $4.12 in July to $3.02 this week (data here), would represent annual consumer savings of $188 billion from the fall in gas prices just so far over the last three months (compared to a scenario where gas stayed at $4.12 per gallon).

An alternative calculation is to use the EIA estimate of 390 million gallons consumed per day in the U.S. times 365 days per year, or 142,350,000,000 gallons annually. For each penny decrease in the price of gasoline, consumers would save $1.4235 billion annually according to this approach, and will save $156.6 billion over the next year from the $1.10 per gallon decrease in gas prices since July.

If gas prices continue to fall over the next month (which seems likely), it could be like a $200-$300 billion tax cut for the economy.

Of course, it does beg the question of why have we not invested more in fuel efficiency of our vehicles? 17.2 miles per gallon seems ridiculously low.

Gas prices fall below $3.00 in Midwest

Lowest reported gas prices today in: Texas: $2.68; Oklahoma: $2.80; Missouri: $2.79; Kansas: $2.87; Iowa: $2.87; and Minnesota: $2.94.

Fuel costs continue to influence driving behavior

The Federal Highway Administration reported that travel during June 2008 on all roads and streets in the nation fell by -4.7% compared to June last year. June marks the eighth consecutive month of traffic volume decline compared to the same month in the previous year. Travel YTD through June in 2008 fell by -2.8% compared to 2007.

Now that gas prices started falling in July and August, will consumers continue to reduce driving, or will they revert back to their old driving patterns? We'll know in about a month, when the July traffic volume report is released.

Gas falls below $3.50 in Kansas

Dorothy is probably happy since gas prices fell below $3.50 in Topeka today. In my May 31 post, I referred to the EIA's (Energy Information Agency) projection that gas prices could fall below $3.50 by the end of the year. Friends scoffed at the notion. Hmmm... Now to see what impact the backed-up traffic jam on the Mississippi River is going to have.

Better benchmark for gas prices

Warren Meyer added a twist to Mark Perry's analysis of what 1,000 gallons of gas costs as a percent of per-capita disposable income (click on graph for larger image). The key for households, Warren maintains, is not how much it costs to buy 1000 gallons, but how much it costs to buy the gas required to drive their typical annual miles. Using 15,000 as an average driving miles per year per person, he gets the result above. So, while I too think paying $4 for gas is not my favorite way to dispose of my income, in terms of average household pain created, gas prices are quite far from their historic highs.

The effect of the media on gas prices

Harvard economist Martin Feldstein explained in today's WSJ (click here) that the relationship between future and current spot oil prices (spot price + carrying cost = futures price) implies that an expected change in the future price of oil will have an immediate impact on the current spot price of oil.

When oil producers concluded that the demand for oil in China and some other countries will grow more rapidly in future years than they had previously expected, they inferred that the future price of oil would be higher than they had previously believed. They responded by reducing supply and raising the spot price enough to bring the expected price rise back to its initial rate.

Hence, with no change in the current demand for oil, the expectation of a greater future demand and a higher future price caused the current price to rise. Similarly, credible reports about the future decline of oil production in Russia and in Mexico implied a higher future global price of oil – and that also required an increase in the current oil price to maintain the initial expected rate of increase in the price of oil.

Once this relation is understood, it is easy to see how news stories, rumors and industry reports can cause substantial fluctuations in current prices – all without anything happening to current demand or supply.

University of Michigan economist Mark Perry also notes that the spot price of oil will fluctuate even without speculators playing a role. After all, speculators have no control over the global supply of, or global demand for, physical barrels of oil. Speculators respond to market conditions, they don't create market conditions.

Now here is the good news. Any policy that causes the expected future oil price to fall can cause the current price to fall, or to rise less than it would otherwise do. In other words, it is possible to bring down today's price of oil with policies that will have their physical impact on oil demand or supply only in the future.

Increasing the expected future supply of oil would reduce today's price. Any steps that can be taken now to increase the future supply of oil, or reduce the future demand for oil in the U.S. or elsewhere, can therefore lead both to lower prices and increased consumption today.