Shale Boom Cuts Electricity Costs by 50%

Posted by - Tuesday, January 17th, 2012

It's rare that we have an oversupply of any resource in this day and age. It's not rare in the natural gas industry though...

USA TODAY reported that this winter's December marked the fourth warmest winter in 117 years, contributing to a slowed natural gas demand and increased supply. Supplies this winter are 17% above the five-year average.

The oversupply has pushed prices drastically low, cutting electricity costs by 50% since 2008. Savvy investors are shying away from more expensive forms of alternative energy, especially solar and wind.

Other markets simply can't compete with the low prices.

Overall, natural gas futures prices have dropped by 35% this year. This has been pleasant news for many struggling families who use natural gas to cook their meals and heat their homes, but bad news for a few alternative energy companies seeking growth and expansion.

Consequently, a lot of those ambitious energy companies are now caving in and canceling pre-existing plans to expand alternative projects due to the fierce competition. Here are three examples:

  • CMS Energy Corp. (CMS) – called off a $2 billion coal plant on account of low natural gas prices due to high shale supplies.

  • Exelon Corp. (EXC) – originally, they had plans to expand two of their nuclear power plants. That plan is now a no-go on the same principle as the canceled CMS coal plan invesment.

  • NetEra Energy Inc. (NEE) – NetEra postponed plans for their wind energy projects initially intended for next year.

According to Bloomberg:

Power producers’ profits are deflated by cheap gas because electricity pricing historically has been linked to the gas market. As profit margins shrink from falling prices, more generators are expected to postpone or abandon coal, nuclear and wind projects, decisions that may slow the shift to cleaner forms of energy and shape the industry for decades to come, Mark Pruitt, a Chicago-based independent industry consultant, said in a telephone interview.

Citibank commodities analyst Anthony Yuen sites the energy market as being “overwhelmed with gas.”

His predictions suggest that the price will average around $3 for 2012. The unseasonably warm temperatures could push prices even lower; below $2...a low this sector hasn't seen in a decade.

When looking at the big picture, these observations are a welcome boost to the economy. 

More than 50% of U.S. homes rely on natural gas for heat so 25% of the nation's electricity is made from it. Lowered costs are permitting families and small businesses to use the saved money elsewhere. Consumers are saving approximately $200 each year, according to a Navigant Consulting study.

As those savings keep climbing, small buisness owners and families become more confident and optimistic; with more money to invest in their businesses as well.

Falling heating and electric costs are offsetting the impact of high gasoline prices and enabling families and small businesses to spend on other things.

...

For companies that make plastics, fertilizer and other chemicals derived from natural gas, falling prices are a windfall. The same goes for makers of products from steel to bricks to beer. All use a lot of natural gas to heat their furnaces. U.S. manufacturers are becoming more competitive globally as a result of the country's cheap natural gas, industry officials say.

If small businesses can survive, allowing those families to thrive once again, there's hope that our economy can rebound too. After all, those small businesses are the backbone of America.

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