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As fuel boom hits U.S., American consumers may not see lower costs

  • Milwaukee Journal Sentinel
  • Published Saturday, Feb. 15, 2014, at 9:14 p.m.
  • Updated Saturday, Feb. 15, 2014, at 9:15 p.m.

Photos

The U.S. is awash in newfound petroleum and natural gas brought about by oil field drilling technologies that promise to make the nation energy-self-sufficient within the next few years.

Just don’t expect cheaper gasoline, diesel fuel, natural gas, propane, heating oil or any other fossil fuel-based products as a result.

Even as the nation’s access to fossil fuel resources grows, American consumers are competing with nearly everyone else on the planet for energy. That energy – even what is developed here at home – tends to go wherever in the world the money is.

“Price, in this free market system, allocates supply. It goes to the highest bidder,” said Jim Ritterbusch, president of Ritterbusch & Associates, an oil trading and advisory firm in Chicago. “Like everything in economics, it’s a moving target. It’s constantly shifting.”

About the only thing industry-watchers agree on is that America’s new petroleum supplies will likely bring about a period of stability in energy markets. “We’re going to see much more stability than we have seen in the last 25 years,” Ritterbusch said.

In a country where petroleum touches nearly everything, that stability is welcome.

“The good news for the economy as a whole is that we are headed closer to break-even in terms of net energy imports and exports. This should bolster the dollar and ward off inflation,” Ethan Bellamy, a petroleum market analyst for Robert W. Baird & Co., said in an e-mail.

“Unfortunately, this bigger-picture macroeconomic concept will be lost on fuel consumers, who only see what they pay at the pump,” he said.

It might be lost, too, on people who had to buy propane this winter or who opened their heating bills and nearly fell over.

For those who heat with natural gas, it could be worse.

The price of natural gas paid by consumers elsewhere in the world remains higher than it is in North America, thanks to the shale gas revolution, said Gale Klappa, head of Wisconsin Energy Corp., Wisconsin’s largest electric and gas utility.

Shale gas is natural gas that is found within shale rock formations. Shale gas production in the United States has gone from virtually nothing in 2000 to more than 25.7 billion cubic feet per day in 2012, according to the U.S. Energy Information Administration.

“The price in Europe is still more than double what customers are paying here in the U.S.,” Klappa said.

Those prices will eventually catch up to each other, he said.

“Markets tend to be global these days, so when you see a price differential like that, eventually over time those price differentials will narrow,” Klappa said.

Demand for natural gas also is expected to grow, whether from increased use for electricity generation or for truck fleets.

And, like just about every type of petroleum product in the U.S., exports of natural gas also are expected to grow.

Dominion Resources Inc., of Richmond, Va., which shuttered its Kewaunee, Wis., nuclear power plant in May 2013, is focusing its investment dollars on a $3.8 billion natural gas export terminal off the coast of Virginia.

Exporting gas

Analysts say the U.S. will export more natural gas than it consumes as soon as 2016 or 2017.

“To a great extent, analysts also believe there’s still sufficient supply to meet both the demands for the U.S. as well as what we want to export,” said Valerie Wood, who follows the natural gas market for Energy Solutions Inc. of Verona, Wis.

In some parts of the country, there is so much natural gas that producers burn it to get rid of it.

Oil producers in North Dakota, for example, burn off natural gas because oil is more profitable and the infrastructure to handle natural gas has not kept pace with the rapid development of oil production in the state.

“With natural gas, there is a very robust storage market and dense pipeline infrastructure in the U.S. that allows us to have adequate supply during cold winters,” Kenneth B. Medlock III, senior director of the Center for Energy Studies at Rice University in Houston, said in an e-mail.

When it turns bitterly cold, as it has this winter, the ability to deliver natural gas to particular markets becomes stressed due to limited pipeline capacity, Medlock said. When that happens, the price in the affected markets soars. But that is usually a short-lived situation that resolves itself once the weather starts behaving normally.

This year could cause a shift in the conventional wisdom on natural gas prices, Wood said.

Many thought natural gas exports would not cause a meaningful increase in prices. That may change after the price of natural gas spiked in early January, escalating to a four-year high in the northeastern United States during the first Arctic blast.

“Most don’t think it’s going to be as significant an issue on pricing,” Wood said. “At the same time, that could be rethought now after this major run-up because we haven’t had a major price run-up since 2010. The market’s been very stable.”

The bitterly cold winter has brought speculators back into the trading of natural gas futures. Price volatility, including a 10 percent jump in one day in the price of natural gas futures, also has returned to the market.

Meanwhile, there is growing consensus that the U.S. will soon begin allowing the export of crude oil, which has been banned since the oil supply shocks of the 1970s.

That only complicates an energy marketplace that has been turned on its head.

“That will be the big story this year and next,” Ritterbusch said. “A lot of countries that have excess refining capacity will be wanting to buy our crude.”

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