FOOTE: Natural gas is turning the world upside down | Mississippi Politics and News
Submitted by Ashby Foote, Bigger Pie Forum
Price discovery is an essential part of free market economies. This is how entrepreneurs, businesses and investors identify risks and opportunities when allocating capital to both avoid pitfalls and exploit new developments in the economy. Low prices can mean oversupply or perhaps falling demand. Higher prices can mean increased demand or unexpected shortages. Some price changes are transitory, others are secular. And on rare occasions, price movements can indicate disruptive innovation. In the commodities market, careful analysis of price signals can be the difference between success and failure.
This year’s volatile commodity prices, with the Commodity Research Bureau (CRB) index up 40%, is good proof of the value of price discovery.
Despite all the fire and sulfur that fossil fuels have taken in recent years, they are still the big dogs on the world’s commodity exchanges. The three main commodities traded in the world are crude oil (WTI), crude oil (Brent) and natural gas. Millions of contracts are traded every day, each representing one thousand barrels of oil or ten thousand MMBTUs of natural gas. This equates to billions of dollars from producers, refiners, power producers, commodity funds, investors and even some speculators. These millions and billions of trade flows generate the prices that inform investors and businesses, and also help determine the end prices consumers will pay for their energy products at the pump or at the wall outlet.
Companies ignore price discovery and its signals at their peril. A good example of how things can go wrong happened a decade ago here in Mississippi. The 2008-09 financial crisis severely depressed commodity prices in early 2009 to include oil – down to $ 44.76 and natural gas – down to $ 4.19. Four years later, in March 2013, oil had fallen back to $ 93.45, but natural gas was even lower at $ 3.90. These four years have seen the long-term correlation between oil and natural gas prices broken. Why? The revolution in hydraulic fracturing had reached critical mass creating vast new abundances of natural gas far exceeding market expectations and demand, resulting in favorable subsoil prices.
This mattered in March 2013 when the Mississippi Civil Service Commission (PSC) held a rate hearing about Mississippi Power’s controversial Kemper coal gasification power plant (MPC). Buses full of taxpayers had driven hundreds of miles to the Woolfolk Building to argue their case against the proposed fare hike. MPC’s economic argument for its lignite-fired âclean coalâ plant was based on the very high prices of natural gas. Their projections, made three years earlier, predicted natural gas prices to average at least $ 12 per MMBTU and go even higher to $ 20 over the next 20 years. When his turn came, lawyer Robert Wise, a pro bono lawyer for two taxpayers, presented PSC President Leonard Bentz with exhibits explaining with detailed tables and graphs why the Kemper lignite plant could not not compete with natural gas made cheap and plentiful by the hydraulic fracturing revolution. Commissioner Bentz replied that in previous hearings experts had told him that no one could predict the price of natural gas and that MPC should therefore prepare for higher gas prices. MPC held firm with its pre-fracking projections made in 2010. The PSC granted MPC its 15% rate hike, but denied any caution about the construction underway. The prize finder was killed on the road to Kemper. Kemper’s “clean coal” project was finally unplugged in 2018. It was a technological and financial calamity that reportedly caused two of the PSC commissioners to quit their jobs and cost them more than $ 6 billion. Mississippi Power and its parent company, Southern Company. depreciation.
Fast forward to 2021 and commodity prices are again providing dramatic signals, especially fossil fuels. Year-to-date, coal is up 201% ($ 243), natural gas 131% ($ 5.55) and petroleum (WTI) is up 66% ($ 82.11 ). In Europe and the UK, natural gas prices are up alarmingly 389% and 318% respectively. Such huge moves in very liquid contracts call for scrutiny. This could well be one of the big economic stories of the year. What is the message of these price signals and what can they portend?
Here’s one possible explanation: The confrontation between the global economy’s decarbonization efforts to combat climate change and the insatiable and growing global demand for electricity has created unintended consequences. A story back – the incredible success of fracking over the past decade has created plentiful supplies and very low prices for natural gas. Over the past decade, natural gas has become the fuel of choice for electricity in America, doubling its share from 20% to 40%. It is also a key electric fuel in Europe and China. The liquefied natural gas (LNG) market has also experienced spectacular growth. At the same time, the zeal to reduce CO2 emissions has resulted in the closure of hundreds of coal-fired power stations and mines. Thanks to generous government subsidies, new investments in electric fuel processing have focused on solar and wind farms. For all the attractive qualities of wind and solar power, their âintermittenceâ makes them incapable of sending on order. The result has been a drastically altered electric fuel mix, both at home and abroad, with a much greater reliance on natural gas for reliable and distributable electricity.
The huge rise in natural gas prices this year could simply be due to growing demand catching up with supply, combined with excessive investments in fuel sources that are not always available. Ironically, the quest to protect the planet from climate change may have made our electrical system more vulnerable to ordinary weather events like cloud cover or non-blowing wind.
Submitted by Ashby Foote. Foote writes for Bigger Pie Forum. Bigger Pie Forum – Promoting market-driven economic growth for a bigger, brighter Mississippi. Learn more about BPF here.