The Future of Shale Gas

The Rise of “Unconventional” Gas

Shale gas is a form of natural gas that can be found in shale rock formations which are in abundance around North America, China, Argentina and North Africa. The controversial method of releasing shale gas has started to gain global recognition and may be what is needed to reignite the oil & gas industry.  Currently the largest producers of shale gas are Canada and the United States. Shale gas has begun to gain ground against importation of LNG (Liquefied Natural Gas) and oil, as governments have seen it as an opportunity to become energy self-sufficient and reduce imports. The rise of shale gas as a substitute for LNG has had an effect on the price of gas, and the relationship between supplier and consumer.

Analysis:

Gas prices based on the Henry Hub Natural Gas Front Month Futures reached a peak of $13.50 in 2008 the highest price of gas witnessed since 2005. With the then emerging market of shale gas and the economic crisis, gas prices reached had reached new lows and began to average at a lower price between 2008 and 2010 of $6-7. The developments of new shale fracking technology, government subsidies and guarantees have pushed the price of natural gas in 2012 into the region of $3.00-3.50. This has had a serious impact on the supply &  demand relationship as there has been a major shift in supply.

Picture1

As noted in the graph above there is a radical shift in the position of the supply curve, this is because the determinants of supply have changed making it easier to supply natural gas and the factor that there is another method of obtaining natural gas (shale gas). It is important to note how there would not be a surplus in this example of the United States as it is easy to decrease the amount of natural gas imported. It is also within the interest of the country politically to become self-sufficient, and develop a prospering economic sector. It is speculated that by 2035 the United States will be in a position to begin exporting natural gas, whereas countries such as Japan are still wholly reliant on imports of both gas and oil.

There is no major change in the demand of gas, as there is still the use of oil and coal for energy production and fuel. In time there may be an increase in demand as noted in the article as it will become more affordable to produce cars and public transport driven by natural gas as well as focusing energy production through more abundant natural gas. Another factor identified in the article that is restricting the increase of demand are the negative connotations that the public currently hold towards the shale fracking process, that it harms the environment through the contamination of water supply and causes minor earth tremors.

There is also the factor of the cross elasticity of demand, as shale gas is a substitute for imported LNG. If the price of obtaining LNG through imports increases, then there will be a greater demand of shale natural gas as it easier to obtain and does not rely on importation, therefore an inelastic relationship.

Picture2Evaluation:

The shale gas industry can still be seen as an emerging market, solid foundations have been built in the Northern American market. This now poses a problem to gas exporters as Europe has had to depend upon them for natural gas for the past decade such as Gazprom who are likely to lose market share. The fracking process can also be applied to the extraction of oil from shale formations. This may have an effect on the price of oil around the world, and will bring into question the economic security of countries dependent on oil exports. There is the issue of the environmental impact of the fracking process, and issues surrounding this such as noise pollution and the possible water contamination due to the chemicals used in the fracking process. As the switchover from oil to gas is made, the price of gas will eventually increase due to increased demand. The article states that $90 Billion worth of investment is being injected into the industry as a result of the Shale Gas boom in the USA; this makes it clear that governments are willing to circumnavigate the surrounding issues.

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