Natural gas is a relatively obscure energy source compared to its more popular companion oil. Most people rarely think about it - it heats their house and if there is a particularly cold winter, their heating bill tends to rise. Thought process done. However, natural gas has started to become more mainstream as pricing patterns around the globe and new technologies are awakening the industry.
First things first. In the United States natural gas prices have fallen from around $4.50 in January 2011 to 2.30 in January 2012 - nearly a 50% drop. This kind of move in prices obviously brings attention, but what makes the story more interesting is that the global market - which usually tracks within $1 or each other - have become completely unlinked. Sampling during the fall of 2011 highlights the pricing discrepancies around the world - 3.64 in the continental U.S., $9.89 in Belgium, $10.90 in Spain, $14.44 in India and $16 in Japan and South Korea. Experts mark 2008 as the starting point for this discrepancy and point to structural factors around the world for price changes and the inability of prices to converge.
Around the world, different pricing dynamics have caused prices to diverge, while industry practices have slowed the convergence of the prices. In the United States, new technology allowing companies to extract gas from shale has greatly increased gas supply while the relatively warm winter has decreased demand. In Asia and Europe, gas prices are linked to Oil and other alternative fuels respectively, which have caused prices to increase. Normally, gas would be diverted to higher paying locations to normalize supply and demand and equalize price. However, much of the gas in the world is delivered by long term contracts that prohibit the diversion to different locations and many transportation ships are under contract to only sail to and from certain ports. Furthermore, Asia consumes mostly liquified natural gas (LNG) which requires a large investment in infrastructure and demand has spiked as Japan tries to diversify its energy sources away from nuclear.
Where are gas prices going? Many seem to think that global prices will continue to show the same extreme disconnect. In the United States (arguably the most extreme), supply is expected to continue increasing however at such a low price it becomes profitable for utilities to start using gas, instead of coal, to produce electricity. Other industries might also find it profitable to make the switch from other resources which could help stabilize prices in the United States.