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Technology, Environment, and the Future of

Natural GasPosted Feb 24, 2010

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Economics, from BVT Publishers. Check Ed Dolan’s Econ Blog regularly for more slides like this.

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A New Focus on Natural Gas

Natural gas has long been one of America’s leading domestic energy sources

In the 1980s, gas production slipped to third place behind oil and coal

Now it is making a comeback—by the end of 2009, it was in a virtual tie with coal, and rising fast

Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

The Role of Technology

Technology is part of the reason. New methods have increased production of “unconventional” gas from sources once thought impractical to tapMethane from coal bedsGas from shale formationsTight gas from hard rock formationsGas from very deep wells

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How Does Technology Affect the Market?

How does new technology affect the supply and demand for natural gas?

Does the demand curve shift? If so, show the new demand curve as D2

Does the supply curve shift? If so, show the new supply curve as S2

Show the new equilibrium price as P2

Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

The Effect of Technology (Answer)

New technology reduces production cost and shifts the supply curve to the right, from S1 to S2

The demand curve does not shift The market moves along the demand

curve to a new equilibrium at P2

Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Low Carbon Content Helps Drive Demand

Concern about climate change has also been a factor in the rising popularity of natural gas

Natural gas produces significantly lower carbon emissions per unit of energy produced (Btu) than do other major fossil fuels

New regulations and incentives encourage use of natural gas

Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

How does low carbon content affect the market?

Starting from price P2, how do incentives and regulations that encourage low-carbon fuels affect the market?

Does the demand curve shift? If so, show the new demand curve as D3

Does the supply curve shift? If so, show the new supply curve as S3

Show the new equilibrium price as P3

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The effect of low carbon content (Answer)

Pressure to switch to low-carbon fuels shifts the demand curve to the right, from D1 to D3

The supply remains at S2

The market moves along the supply curve S2 to a new equilibrium at P3

Question: How do we know whether gas prices will rise or fall when both the supply and demand curves shift to the right?

Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

The result so far: A net decrease in gas prices

Other things being equal, the technology-driven shift in supply tends to push the price of gas down

Other things being equal, increased demand for low-carbon fuel tends to push the price of gas up

In the recent past, the supply curve has shifted by more than the demand curve, and gas prices have trended downward

If economic recovery speeds growth of demand, a stronger demand shift could cause gas prices to rise again