New Age Of Cheap Energy Approaches: A Tribute To The Virtues Of Markets, Free Trade And Capitalism

UK Telegraph - We have all become so used to reading that the end of the world is nigh that we tend to close our eyes and stick our fingers in our ears when there is evidence to the contrary. So you have probably missed one of the biggest pieces of good economic news to emerge recently: energy prices are coming down, in some cases to record lows. Furthermore, even if prices start to recover, they are not likely to return to the ridiculous levels of 2008 any day soon.

This is excellent news, of great import. The trend for gas and electricity bills is downwards; diesel is back at the same price as regular gasoline; the world is practically choking on natural gas, and is potentially awash with oil. The main international natural gas price has this week fallen to a record low, due to a surplus of new resources from North America (see chart above). Even the stubbornly high oil price has dropped.

How come natural gas prices have fallen so much? To understand why, you need to get up to speed on the exciting phenomenon of so-called tight gas. This, after coal, could perhaps be the world’s most prolific energy source. Hitherto, we have relied on conventional deposits of natural gas. But tight gas is locked into difficult rock formations, such as shale, and in the past couple of years the industry has found low-cost ways of fragmenting those rocks in order to get at the gas, particularly in America. The result is that US gas reserves have effectively doubled, almost unnoticed; and the same technology can be readily applied in Canada, Australia, Asia and even parts of Europe.

As we go into the autumn, US gas storage units are almost full to bursting. Facilities once designed to import are being turned around for export. When it comes to gas, America is the new Russia. And for the rest of the world, tight gas equals one thing: freedom. How has this amazing development come about? Well, my friends, it is the market at work. The high prices of the past decade incentivized a scramble for new technology and projects which are now producing.

An era of cheap and abundant energy will be a much-needed tribute to the unfashionable virtues of markets, free trade, and capitalism.

MP: As the chart above shows, inflation-adjusted natural gas prices have fallen by 80% since the peak in 2005, and are now close to the prices that prevailed in the 1990s. In addition to the significant benefits of falling natural gas prices, another advantage to natural gas is that there is “no OPEC cartel to dominate it,” as the article points out.

HT: Arthur Little

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