The higher price of oil is helping tank the price of natural gas
The higher price of oil is helping tank the price of natural gas
In this economy, at least some things are getting cheaper. Natural gas prices in West Texas have dipped below zero — yes, some operators are paying to get rid of gas. At the same time, higher oil prices and increased demand is spurring more crude production in the Permian Basin. In other words, the higher price of one commodity is helping tank the price of another.
In West Texas, energy companies are often producing crude oil and natural gas at the same time — Steve Cicala at Tufts University said you can think about it like parts of a chicken.
“White meat is more popular than dark meat. But there’s no way to produce white meat without growing a few legs,” he said.
So what happens when there’s a spike in demand for chicken breast? “There’s an excess of chicken legs running around that needs to be sold somewhere,” Cicala said.
In West Texas, those excess chicken legs are, of course, natural gas.
“That gas becomes a secondary stream,” said Ed Hirs, an energy economist with the University of Houston. “The one with the most value, of course, is the oil, which is now approaching the high 80s per barrel. So the producer makes the money on the oil and essentially is giving away the natural gas.”
Hirs said oil is also easier to get out of the isolated Permian Basin than natural gas, which needs pipelines to get it to customers.
“The production of natural gas has outstripped the growth in pipelines to take to market,” he said.
And natural gas isn’t exactly chopped liver.
“This should be a boon to the consumer. And it is because it keeps some manufacturing costs low,” said Karr Ingham, a petroleum economist with the Texas Alliance of Energy Producers.
Natural gas is a major U.S. export in the form of liquefied natural gas; it heats up our chicken legs and keeps the lights on.
“A lot of electricity — I mean a lot of electricity — is generated with natural gas as the fuel,” Ingham said.
And he said if natural gas were more expensive, electricity would be too.
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