Blog Post

Is the Natural Gas Revolution Real?

Dec 13, 2012 | Alan J. Krupnick

Is the natural gas revolution the real thing? For all the talk about revolution, at least from forecasts, you would hardly know it. In the EIA’s 2013 Annual Energy Outlook, released last week, natural gas’ share of the energy mix goes up only 1%. So what is the big deal? I see five major impacts of abundant domestic natural gas, with some qualifications:

First, the huge influx of gas from shale deposits means gas prices are very low. Cheaper energy prices mean increased consumer and producer surplus, i.e., economic welfare. It’s good to have cheaper energy, other things equal. Most forecasts predict current low gas prices will persist in the near future, or slowly increase, while electricity prices will be lower than they would have been. This means billions in welfare improvements and in reduced out of pocket expenditures on electricity.

Second, the domestic supply curve for natural gas is much “flatter” (in economics-speak, more elastic) as a consequence of shale gas development. This means that we can create new uses and demands for natural gas, like exports and new industrial development, without much fear of major price increases. Businesses can do long term planning with less price uncertainty.

Third, natural gas supplies alter our future energy security position – though not in the way most people think. Today, oil demand is the source of our energy insecurity. But oil and gas are not currently substitutes. So, unless gas takes a major position in transportation, energy security is largely unaffected. However, the U.S. was poised to be a major gas importer as our conventional gas supplies were dwindling. This fear is now replaced with expectations for the net export of LNG, as EIA predicts by about 2020.

Fourth, cheap gas creates an opportunity to diversity our transportation fuels. Today, 97% of transportation runs on oil. Our research at RFF shows that there is an economic case for penetration of LNG-fueled heavy-duty trucks into the market. In the new 2013 AEO, this share of trucking goes to 31%. While natural gas is not currently economic for light-duty vehicles according to our analyses, a recent breakthrough in producing ethanol from natural gas holds promise of E85 fuel cheaper than gasoline. Millions of E85-compatible vehicles are already on the road with 2,000 refueling stations, making a transition to natural gas much simpler.

Fifth, abundant gas can contribute to industrial growth and revitalization. Dow Chemical, which uses natural gas as a material for producing plastics, has assembled a list of 103 new manufacturing projects, representing $90 billion in potential investments that various companies have proposed or begun because of cheap gas. While all this activity, as well as the direct effect of drilling, producing and moving this gas has created boom towns and helped refill state coffers, it has also disrupted many communities. And nomadic companies seeking to maximize their profits can move in and out of communities as gas and oil prices change.

Thus, there really is a revolution going on, an it's making the country economically better off. However, there are concerns and uncertainties – more on them in another post.