As Natural Gas Prices Drop, Could Economy be at Risk?

Photo Courtesy of Arthur Berman

Arthur Berman is the head of Labryth Consulting, a Geological consulting firm.

People see a lot of different things when they look at the American natural gas industry. Some see potential environmental dangers. Others see it as a bridge to renewable energy. President Obama envisions more than 600 thousand new jobs from it. But when Arthur Berman looks at the natural gas industry, he sees an iceberg on the open sea.

“We gotta turn to miss that iceburg, but we sure better start turning ten or 15 miles away from it or else we’re gonna hit it,” Berman, a geologist who consults for energy companies, told StateImpact Texas.

So it’s no surprise that lately Berman’s developed a reputation as the “Debbie Downer” of the natural gas industry. For one thing, he doesn’t think the U.S. has as much of it as has been estimated (up to a hundred years). Berman estimates that reserves could only meet demand for the next 23 years.

For another, he believes that all the cheerleading for gas has left U.S. financial markets in danger. Here’s how: the rush to extract has brought down natural gas prices. That’s meant less profit for drillers and gas companies. But some of those companies continue to drill. Berman says you’ve got to leave the shale fields of South Texas, and pay a visit to Wall Street to figure it out.

“Apparently investors — Wall Street — broadly likes growth, they like to see growth. As long as there’s growth somebody’s going to buy that stock and the stock price stays high,” he said.

Berman says some companies are continuing to drill to keep investment up, even as their profits are plummeting. If natural gas prices continue to fall, and Berman thinks they will, those companies will face a day of reckoning. With so much of the financial markets tied to energy, that could have a ripple effect outside of the natural gas industry.

Stop us if this is starting to sound familiar, he says, maybe that’s because it should.

“I’m not implying that this situation would be anywhere near the magnitude of the subprime [mortgage market], but it’s comparable at least in terms of the over-leveraging, in terms of the broad enthusiasm. Everybody thinks this is a great thing,” says Berman.

His message has gotten him a lot of attention among those who watch the energy industry, and not all of it good. Most famously, he was recently quoted in a Rolling Stone article that, he says, mischaracterized his views on natural gas.

Others have questioned the substance of this arguments.

“Look if we’d have had a cold winter this year, like we had the last two years, the price of gas’d be over four dollars,” David Blackmon, of America’s Natural Gas Alliance, told StateImpact Texas.

Reports of the industry’s demise have been greatly exaggerated, says Blackmon, and the laws of supply and demand will ensure gas prices rise again, just as they always have.

“Just in September, the industry was running over 850 natural gas drilling rigs. A month from now it may be under 600. And at some point your going to reduce supply to the point where the price will start going back up again,” Blackmon said.

Berman agrees that prices will rebound eventually, saying it’s a question of when, and how low they go before they do.

In any case, the cost of natural gas raises its own slew of unknowns.  From whether the U.S. should start exporting its natural gas, as some have proposed, to how high your electric bill will be in years to come.

Comments

  • http://fracdallas.org/ Marc

    Shale gas is a fraud, a Ponzi scheme. The game is not to sell gas. The game is to sell gas companies. XTO made out like bandits when ExxonMobil bought them out for $41 Billion when everything was looking good, and ExxonMobil can afford the hit if the bubble bursts, by what about Chesapeake, a company that is leveraged to the hilt.

    Aubrey McClendon, the Chairman and CEO of Chesapeake Energy, recently told Rolling Stone Magazine “I can assure you that buying leases for x and selling them for 5x or 10x is a lot more profitable than trying to produce gas at $5 or $6 per million cubic feet.” (NOTE: It is actually per THOUSAND cubic feet, not million cubic feet, but what is a little error of a thousand times?)Read more: http://www.rollingstone.com/politics/news/the-big-fracking-bubble-the-scam-behind-the-gas-boom-20120301#ixzz1pDvSiOTN

    This year, Chesapeake estimated that it will take in about $3.5 Billion LESS than it spends. That is a prescription for disaster, not so much for McClendon who has limited liability protection, but for his investors who counted on his expertise and business acumen to make all of them wealthy. Chesapeake may have drilled so much that they drilled the entire industry into a hole from which it cannot escape.

    And, all those false claims of “energy independence from the Middle East”, which only supplies a VERY small portion of our energy (Canada and Mexico are our two largest foreign suppliers) fail when you consider how fast companies are building export terminals to turn natural gas to liqufied natural gas (LNG) to export to China and India so they can take away even more American jobs.

    The oil and gas industry makes politicians and used car salesmen look honorable by comparison!

    • Word Warrior

      Shale gas is the new “bubble flavor of the day”.  When T. Boone Pickens, or Aubrey McClendon, is out there hawking an investment, people listen, but I think it only means he is in on the ground floor of some money making scheme, and once again, I am not.  When the Great Creator made this Earth, he buried some treasures like shale gas where we couldn’t get it. I guess we are just smarter than he is, ’cause we can get it even if it means we use all our water, ruin our rivers and air, and crumble our homes’ foundations to do it.  We may not be so smart, but we sure are arrogant.

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