EC Oil Drove Recovery

Did you know that industrialized countries in Europe and Asia didn’t share in this windfall?

Let’s drill down a little deeper and add some color to the landscape.

A barrel of oil contains 5.8 million British thermal units (MMBtu) of energy, and a thousand cubic feet (Mcf) of natural gas contains 1 MMBtu of energy. Historically, oil and gas prices were tightly coupled based on energy content, and the cost of a barrel of oil was roughly 5.8 times the cost of an Mcf natural gas.

In the US, the coupling of oil and gas prices began to breakdown in 2006 as rig automation, precision horizontal drilling and hydraulic fracturing gave companies the ability to produce oil and gas from massive but previously uneconomic shale resources. Since gas is almost always transported by pipeline and it must be liquified for export, the plentiful new supplies drove gas prices down to previously unimaginable lows.

This graph summarizes year-to-year changes in the price of one MMBtu of energy from West Texas Intermediate crude, Henry Hub natural gas, Brent crude, and OECD natural gas, for the period from 1990 through 2018.

A cursory glance at the graph shows:

  • The sharp decoupling of WTI crude and Henry Hub gas prices beginning in 2006;
  • The surprising decoupling of WTI crude and Brent crude prices starting in 2011; and
  • The abrupt slide in global oil prices starting in 2014.

The graph also shows that the OECD gas price remained tightly coupled with Brent crude, so gas consumers in Europe and Asia did not benefit from the decoupling of US oil and gas prices.

While a decade of bargain-basement natural gas prices and five years of low oil prices have not been a boon for debt-laden oil and gas producers, the cumulative benefit to the US economy is almost incomprehensible.

  • A $1.2 trillion direct contribution to GDP from reduced oil import spending; and
  • A $2.4 trillion addition to individual consumers’ discretionary income, an average of $773 per year for every man, woman and child in the country.
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Comments

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Dick Kaplan 2 years ago Member's comment

Excellent read, well worth the accolades. The ending really sums up how critical this issue is.

Susan Miller 2 years ago Member's comment

"Does the magnitude of these accomplishments surprise you as much as it did me?" Why yes, perhaps even more so!

Alexis Renault 2 years ago Member's comment

I was more concerned with this part:

While North America and Europe pared their collective CO2 footprint by 6%, the rest of the world grew emissions by 102%.

That's deeply troubling.

Jack Lifton 2 years ago Member's comment

There is no way to argue with the author's conclusions. This is all that needs to be said upon the subject.

Bill Johnson 2 years ago Member's comment

I agree completely.

Dave Schneider 2 years ago Member's comment

Great article.