US Shale Gas: The Unsung Hero of a Dangerous Winter

I walked outside this morning to pick up my newspapers. It was still dark, but I felt this strange sensation. I wasn’t sure exactly what it was. Then it hit me: warmth! But don’t bet the ranch that winter is over. We could still get slammed with more Arctic air and more snow and ice, if you believe the market.

Last week, traders bid up natural gas March futures to the highest price point in over five years, peaking at $6.275 during one buying frenzy. On the oil side, March crude is also solidly priced, with future U.S. barrels selling well over $103, the highest price in four months. Compared to that, April natgas will set you back a mere $4.95. It’s a relative bargain. Whew!

Clearly, near term, energy traders are paying top dollar for security of supply. Their money is on the table. Why the high prices for gas and oil if things are warming up?

When it comes to the larger picture of U.S. gas storage, the nation just dodged a very dangerous energy bullet. Indeed, looking back, we could have lived through an utter energy disaster this winter. But that didn’t happen, or we’d be talking about it — and it’s worth understanding why.

The fact is, natgas storage volumes are currently at extremely low levels, unseen since the old Peak Oil days of 2003. Today’s low storage volumes are due to gas drawdowns over the very cold winter, to be sure. Literally hundreds of millions of burner tips were hot for weeks at a time. You know that.

But there are other energy angles at work, too. These have not received much attention in the media, but are worth understanding.

One important point is that the Midwest had a wet fall in late 2013, and farmers used unexpectedly high levels of natgas to dry crops. Propane supply (a natgas byproduct) simply dried up.

Worse yet, California is in the midst of a historic, ongoing drought, which has dramatically reduced hydropower output from dams out west. Natgas-fueled power plants made up the difference, and that will continue into the indefinite future.

Add up three unexpectedly high demand curves — Midwest agriculture, west coast electric demand, and east coast heating — and the national energy system was/is heavily stressed. No wonder natgas storage is at such a low level.

Yes, the nation pulled through. But when you look back at it in another way, things could’ve been much worse. How bad? The U.S. gas supply might have crashed this past winter. I mean spot shortages all over, and even regional shutoffs.

Why would I say that? Look back to 2003, when natgas storage volumes were exceptionally tight. In the winter of 2003, gas supply simply wasn’t there when demand hit, and natgas futures spiked upward to nearly $12.

This winter, despite record cold and other gas demand, gas prices were more restrained. Otherwise, at $12 gas, imagine your monthly heating bill being perhaps three times what you’re paying now. Instead of, say, $300 per month in winter, it would be $1,000. And apply that across millions of households. It’s a big number.

Or think it through in even bleaker terms. We could have had entire regions of the country suffer severe gas shortages. What if this past winter there was simply not enough gas in the lines? Pipeline and utility managers would have had to start shutting valves to, say, large industrial users.

Why didn’t it come to that? There was no real natgas shortage this winter, right?

Right, all because the U.S has a so-called “gas glut” based on fracking and shale gale. As I said before, we dodged an energy bullet. We’re just so brilliant, eh? Oh, wait…

Look back to the last natgas shortage, in 2003. That was an embryonic time for fracking and developing gas from shale. One big play was just kicking off, down in the Barnett Shale of Texas.

Did anyone really plan out the energy development of the subsequent decade? Did anyone have such foresight? Anyone in high political office? Any congressional staffers? At the Department of Energy? The Environmental Protection Agency? Heck, anyone at Exxon Mobil or Chevron? (Hint: The big oil companies missed the U.S. shale boom.)

C’mon… Who’s on record in 2003 as saying, “Hey, we have low natgas volumes and might not be able to meet demand. We had better get squared away for the next decade. Let’s pursue an aggressive, national-level approach to using new tech to open up resource plays like shale gas.”

Umm… Nobody said that. Nobody — certainly not in Washington or any state capital — planned what happened in the past 10 years. Fracking and the gas glut was a grass-roots phenomenon that arose from the hinterlands. It started in and grew out of “flyover” country, as far as the national elite are concerned.

Indeed, when it comes to fracking and shale gas, the federal government — and many state governments — spent the past 10 years doing little but opposing development (while cashing the tax checks).

Today, when you look at whence comes the U.S. energy supply, many/most federal and state lands are closed to drilling and fracking. The shale gale, which saved the nation’s bacon this winter, is a phenomenon almost exclusively confined to private lands.

I hope you get my point. We dodged a bad bullet. Fate took a shot at us and missed. We were lucky, I suppose — lucky small U.S. oil and gas companies were so good at developing shale.

Then again, the harder you work, the luckier you get.

Best wishes…

Byron W. King
for The Daily Reckoning

P.S. If you’re still unsure about investing in shale oil and gas, just think of how crucial it is to America’s energy security — as demonstrated this winter. And to make sure you’re able to gain access to the best shale plays on the market, you’ll want to sign up for the FREE Daily Resource Hunter, right here.

Original article posted on Daily Resource Hunter

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Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

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