Natural Gas and Crude Oil Prices in AEO2009 |
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If oil and natural gas were perfect substitutes in all markets where they are used, market forces would be expected to drive their delivered prices to near equality on an energy-equivalent basis. The price of West Texas Intermediate (WTI) crude oil generally is denominated in terms of barrels, where 1 barrel has an energy content of approximately 5.8 million Btu. The price of natural gas (at the Henry Hub), in contrast, generally is denominated in million Btu. Thus, if the market prices of the two fuels were equal on the basis of their energy contents, the ratio of the crude oil price (the spot price for WTI, or low-sulfur light, crude oil) to the natural gas price (the Henry Hub spot price) would be approximately 6.0. From 1990 through 2007, however, the ratio of natural gas prices to crude oil prices averaged 8.6; and in the AEO2009 projections from 2008 through 2030, it averages 7.7 in the low oil price case, 14.6 in the reference case, and 20.2 in the high oil price case (Figure 17).
The key question, particularly in the reference and high oil price cases, is why market forces are not expected to bring the ratios more in line with recent history. A number of factors can influence the ratio of oil prices to natural gas prices, as discussed below. Crude Oil and Natural Gas Supply Markets The methods and costs of transporting petroleum and natural gas are significantly different. The crude oil supply market is an international market, whereas the U.S. natural gas market is confined primarily to North America. In 2007, 43 percent of the oil and petroleum products consumed in the United States came by tanker from overseas sources [66]. In contrast, only 3 percent of total U.S. natural gas consumption came from overseas sources, by LNG tanker. Moreover, the domestic resource bases for the two fuels are significantly different. It is expected that lower 48 onshore natural gas resources will play a dominant role in meeting future domestic demand for natural gas, whereas imports of crude oil and petroleum products will continue to account for a significant portion of U.S. petroleum consumption. Approximately 180 billion barrels of crude oil reserves and undiscovered resources are estimated to remain in the United States, equal to about 24 years of domestic consumption at 2007 levels; however, with more than 70 percent of those resources located offshore or in the Arctic, they will be relatively expensive to develop and produce [67]. The remaining U.S. natural gas resource base is much more abundant, estimated at 1,588 trillion cubic feet or nearly 70 years of domestic consumption at 2007 levels [68]. In addition, more than 70 percent of remaining U.S. natural gas resources are located onshore in the lower 48 States, which significantly reduces the cost of new domestic natural gas production. The large domestic natural gas resource base has been estimated in one study to be sufficient to keep the long-run marginal cost of new domestic natural gas production between $5 and $8 (2007 dollars) per thousand cubic feet through 2030; however, the costs used in that study represent a period when drilling was unusually expensive, because oil and natural gas prices were high. In the future, cost for natural gas development and production could decline significantly as the demand for well drilling equipment and personnel comes into equilibrium with the available supply for those services [69]. In the AEO2009 reference case, which projects a relatively low long-run marginal cost of natural gas, domestic production increasingly satisfies U.S. natural gas consumption. In 2030 more than 97 percent of the natural gas consumed in the United States is produced domestically, yet only 31 percent of the currently estimated U.S. natural gas resource base is produced by 2030. LNG imports remain a relatively small portion of U.S. natural gas supply, with their share peaking in 2018 at 6.5 percent and then falling to 3.5 percent in 2030. The current opportunities for competition between oil and natural gas are relatively small in the United States (that is, the two U.S. supply markets are weakly linked). Although the relatively low costs projected for production of natural gas make it economically attractive in U.S. consumption markets where it competes with oil, particularly in the reference and high oil price cases, they are not low enough to make the United States a competitive source of natural gas for the world LNG market. Also, large-scale conversion of lower 48 natural gas into liquid fuels is expected to be precluded by the inability of project sponsors to secure long-term natural gas supply contracts at guaranteed prices and volumes. Natural gas producers are unlikely to be able or willing to guarantee long-term volumes and prices. Substitution of Natural Gas for Petroleum Consumption In a relatively high oil price environment, as in the AEO2009 reference and high oil price cases, consumers can reduce oil consumption through energy conservation and by switching to other forms of energy, such as natural gas, coal, renewables, and electricity. Natural gas is not necessarily the least expensive or quickest option to implement (in comparison with reducing transportation vehicle-miles traveled, for example). In the residential, commercial, and electric power sectors, petroleum consumption is relatively small, accounting for only 6.5 percent of total U.S. petroleum consumption in 2007. Gradually converting all the petroleum consumption in those sectors to other fuels would have only a modest impact on natural gas consumption and prices. In the industrial sector, the most feasible opportunity for substituting natural gas for petroleum is in heat and power uses, which amount to about 0.61 quadrillion Btu per year [70]; however, most petroleum consumption in the industrial sector (such as diesel and gasoline consumption by off-road vehicles in agricultural and construction activities; petroleum coke; refinery still gas, which is both produced and consumed in refineries; and road asphalt) is not well suited for conversion to natural gas. Also, there is considerable uncertainty about the extent to which petroleum feedstocks for chemical manufacturing could be replaced with natural gas before 2030. At a minimum, considerable downstream investment in chemical manufacturing processes would be required in order to convert to natural gas feedstock. The greatest potential for large-scale substitution of natural gas for petroleum is in the transportation sector—especially, in local fleet vehicles refueled at a central facility, such as local buses, which consumed 0.18 quadrillion Btu in 2006 [71]. Wider use of natural gas as a fuel for transportation fleets also has been advocated; however, the idea faces significant hurdles given the relatively low energy density of natural gas; the cost, size, and weight of onboard storage systems; and the challenge of establishing a refueling infrastructure. In addition, any significant increase in natural gas use could raise natural gas prices sufficiently to reduce the ratio of natural gas prices to oil prices. The Honda Civic GX and Civic LX-S vehicles provide a uniform basis for comparing the attributes of a natural-gas-fueled LDV (the GX) and a gasoline-fueled LDV (the LX-S) that use the same design platform (Table 13). The Honda GX is about 34 percent more expensive, carries 39 percent less fuel (resulting in a much shorter refueling range of about 200 to 220 miles), and provides 50 percent less cargo space, 19 percent less horsepower, and 15 percent less torque. Although natural gas has a high octane rating of 130, the GX horsepower and torque are reduced by the rate at which natural gas can be injected into the piston cylinders because of its lower energy density. Although the higher cost and other disadvantages of natural gas vehicles could be offset at least partially by their lower fuel costs, the lack of an extensive natural gas refueling infrastructure will remain a difficult hurdle to overcome. Consumers are unlikely to purchase natural gas vehicles if there is considerable uncertainty as to whether they can be refueled when and where they need to be. Similarly, service station owners are unlikely to install natural gas refueling equipment if the number of natural gas vehicles on the road is insufficient to pay for the infrastructure costs. In 2008, there were only 778 service stations in the United States with natural gas refueling capability out of a total of more than 120,000 service stations [72]. Public refueling capability for natural gas, ethanol, methanol, and electric vehicles has fluctuated considerably over time, as the different vehicle options have gained and lost favor with the public. Even after the more than 15 years that these alternative fuel options have existed, fewer than 1 percent of the Nation’s public service stations currently offer refueling capability for any alternative fuel. Without an extensive public refueling network, the potential for market penetration by natural gas vehicles will be limited, and until a substantial number have been purchased, an extensive public refueling network is unlikely to develop. Market penetration by natural gas vehicles is also limited by the many alternatives that consumers have for reducing vehicle petroleum consumption, including buying smaller vehicles, reducing vehicle-miles traveled, and buying hybrid electric or, potentially, all-electric vehicles. In addition, price volatility in crude oil and natural gas markets obscures the long-term financial viability of natural gas vehicles. Consequently, AEO2009 assumes that widespread adoption of natural gas vehicles in the United States is unlikely under current laws and policies. Conclusion Through 2030, an abundance of low-cost, onshore lower 48 natural gas resources, in conjunction with a limited set of opportunities to substitute natural gas for petroleum, is projected to raise the ratio of oil prices to natural gas prices above the historical range, as reflected in AEO2009 reference and high oil price cases. Unless there is large-scale growth in the use of natural gas in the transportation sector, it is unlikely that fuel substitution in the other end-use sectors will be sufficient to reduce the price ratio significantly before 2030.
Contact:Philip Budzik
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