The shale gas revolution is celebrating a birthday

George Mitchell, the father of the fracking revolution, is said to have joked that it took him 20 years to become an overnight success. He spent years attempting to marry hydraulic fracturing with horizontal drilling, and finally succeeded in the Barnett Shale in the early 1980’s.

So how could today be the four-year birthday of the shale gas revolution?

Because four years ago today, the long slide in US crude oil prices that began after the early July 2008 peak, driven by the global economic collapse, hit a near-bottom. The NYMEX light sweet crude contract on February 12, 2009 settled at $34.40/b.

It had actually settled less than that right before Christmas, at $33.17, before climbing back over the $40 level and then falling back to the February 12 low.

But February 12 is different than that earlier late-December low. That’s because the next day, US crude prices as measured by the NYMEX contract began a long climb that put levels above $100 about a year ago, and is threatening that mark again. Meanwhile, natural gas rose fitfully for awhile — it actually got above $6 a few times in early January — before its plunge of the past few years, bottoming at a settlement of $1.907/Mcf last April 19.

These two energy commodities, which always had something of a link, essentially had their divorce finalized on February 12, 2009. One year later, on February 12, 2010, the price of crude had risen roughly 98% from its low of one year earlier. The price of natural gas was up only 22%.

natgastocrudeAs a percentage of the price of US benchmark crude, natural gas on February 12, 2009 was about 13% of the price of crude. A year later, it was 7.5%. As that ratio continued to shrink over time — it was less than 2% last April, but more recently has been about 3.4% — it opened up all the possibilities and realities that have been created by the shale gas revolution.

Ethane displaced naphtha in a large swath of petrochemical manufacturing. Companies like Sasol began to look at building Gas-to-Liquids plants in the US and Shell is studying building a petrochemical plant in the Appalachians. The use of natural gas as a fuel gave US refiners an advantage over their international competitors. Fleets sought ways to convert their vehicles to natural gas as a fuel. The list is endless.

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And that doesn’t even mention the shale revolution’s impact on crude production, which by February 2009 already was showing up in monthly US production numbers. It also is most obvious in the Brent-WTI spread, still in excess of $20 despite the Seaway Pipeline reversal and thousands of rail cars trying to do anything they can to get crude away from Cushing, Oklahoma.

But it was the surge in natural gas production that is having an impact on fuel switching that was previously unimaginable. Even though the work that made the revolution possible began when Ronald Reagan was living in the White House, the sweeping change it is creating has its roots in pricing shifts that began four years ago.

Today also is Abraham Lincoln’s birthday. He was known as the Great Emancipator. There’s serendipity in that.

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  1. Jabran at May 9, 2014 3:23 am

    Thanks for this historical reference fully agree with Wanger , he analysis the key point and reason. the point he describing is fact

  2. John Kingston at February 18, 2013 4:18 pm

    But Warren, the problem with your analysis is that you’re dismissing the 2008 price rise solely as speculation. Even if that were true, the fact is it still would not have allowed fuel-switching, regardless of the reasons behind the surge. It was in early 2009 that the paths of oil and natural gas began diverging for good, and that opened up the possibilities we are experiencing today.

  3. Warren W at February 18, 2013 3:10 pm

    While it may make good press to identify one particular day as the start of the “shale gas revolution,” it’s not really accurate. If you look at the chart up top again, you will notice that while the natural gas price as percentage of crude spiked in mid-2008, it was trending down even before then. In fact, 2008 was an aberration, with nearly all commodities peaking, caused by excessive speculation that pushed up in particular the prices of the whole energy basket. We can see similar behavior occasionally in all commodities.
    A better date to pick for the decoupling would be any time after the U.S. recovered from Hurricanes Katrina and Rita. That’s because this was the last hurricane season that mattered for natural gas prices. Since then, the arrival of Cat 4 or 5 hurricanes in the GOM sends an upward price signal for crude, but no longer for natural gas. And that’s because in the year that followed those two hurricanes on-shore production of gas from shale truly took off, driven by prolonged high prices brought about by those two hurricanes. In many ways, we have hurricanes Katrina and Rita to thank for the shale gas revolution.

  4. Ron Wagner at February 12, 2013 1:02 pm

    Thanks for this historical reference. Part of the reason for the delay in using fracking and horizontal drilling is due to the higher profits available in sticking to selling gasoline and diesel. This is still the case. Natural gas is the cleaner fuel, and we should have a national program of wholesale fuel switching through engine conversions. This would benefit all levels of our economy, and greatly moderate record gasoline and diesel prices.


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