Natural Gas – We Got it Half Right

Our energy situation broadly cleaves into two main functions – natural gas, and electricity. Natural gas is used for industry, heating homes and powering stoves, and is taking a greater portion of the electrical generation load. Electricity also overlaps with gas when it comes to home heating and cooling, and is obviously a large component for industrial uses. However, the natural gas and electricity energy industries in the United States have moved in profoundly different directions over the last few decades. The purpose of this post is to describe where we are, as a country, with regards to natural gas. In short – we got it half right.

Natural gas has three main components, broadly speaking – 1) exploration / extraction 2) transportation 3) distribution. In general, natural gas is lightly regulated for exploration / extraction, has general principles for transportation (open access) and is pretty heavily regulated for distribution (local monopolies).

One critical difference between electricity and natural gas is that natural gas can be stored while electricity must be available at the specific time it is needed. Thus users and utilities can store natural gas and have it available for peak times, while the only way to meet peak load demand for electric utilities is to have units on line generating electricity during the hottest parts of the day or to “shed load” by pushing customers off-line to reduce demand.

Both electricity and natural gas are mostly consumed using North American (including Canadian) resources. While OPEC maintains an oil cartel, the fuel used to generate electricity (coal, nuclear fuel, gas) mostly comes from North America. While these resources can be transported across the ocean (for instance Japan imports virtually all of what it needs to fuel electricity) in the USA (and Canada) we have most of what we need for these industries. Until recently there wasn’t a practical way to bring in natural gas from regions that weren’t connected by pipeline, so we were bound to use North American resources.

Exploration & Extraction

The exploration and extraction of natural gas is a mostly unregulated industry (compared to electrical utilities, at least). The biggest constraint was that vast swathes of the US were placed off-limits for natural gas drilling due to environmental concerns. In the 1970’s, a moratorium was placed on new natural gas connections because it appeared that the US would run out of natural gas. However, improvements in extraction capabilities resolved that situation and wildcatters responded to higher prices by finding additional supplies.

Recently it looked as if we were going to run out of natural gas again. Futures prices on natural gas, which were around $2 / unit in the 1990’s, spiked to as high as $14 / unit in the winters of 2006-8 (prices are seasonal and typically move with the weather) but now are below $4 / unit due to the fact that massive supplies of natural gas have been located in shale formations as drillers redoubled their efforts in light of these high prices.

The natural gas industry, as we can see above, is able to use market forces to respond to price signals. Drillers used innovation and new technology to find new supplies which in turn brought down the high prices. If the extraction / exploration industries were heavily regulated and monopolized (like power generation), it is likely that they would just have utilized the high prices as an opportunity to reap large profits rather than to expand supply.

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Mini-Book Review — Easterbrook — Sonic Boom

Easterbrook, Gregg, Sonic Boom: Globalization at Mach Speed, Random House: 2009, 243pp.

Sonic Boom falls within the genre of the quick-reading airport business book. Using a series of places as exemplars (Shenzhen, Waltham MA, Yakutsk, Erie PA, etc.), the author shows how a globalized economy can create prosperity from swampland, and restore prosperity to Rust-Belt and 19th century industrial hubs. The writing is crisp and smooth. The manner is often witty, and occasionally wise-ass. It’s anything but turgid … which is a great relief from many of the “big think” books which come and go on the bestseller lists.

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Leverage, dividends and our insanely low interest rates


Like the famous Seinfeld episode where Kramer struggles to figure out how to profit from the fact that Michigan offers a 10 cent return on recycled bottles, I have been starting at this ad from Interactive Brokers for some time now. This had has been run in myriad financial papers and I have seen it all over the place. It is notable for the fact that it looks like it was drawn “on the back of a napkin” like the fabled dot-com business plans.

The specific elements of the investing plan are as follows:
– Interactive brokers can make margin loans at 1.25% annual interest. This LOW rate of interest is made possible by the country’s current super-low rate policy
– Some stocks are offering dividends as high as 5%. In the current low interest rate environment (you are likely to get 2% on CD’s & government paper, and almost nothing on your money market and bank deposits), that 5% rate seems very enticing, especially since dividends are taxed more favorably on individuals than interest income (dividends are as low as a 15% rate, while interest income is as high as 35%+)
– Interactive brokers will offer you LEVERAGE. By leverage, this means that they will LOAN you more money than you have in your brokerage account so that you can invest and magnify your returns, either UP or DOWN

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Just Because I Like It

Some lines that seem appropriate for a cold and snowy day…

‘Twas the soul of Judas Iscariot,
Strange, and sad, and tall,
Stood all alone at dead of night
Before a lighted hall.

And the wold was white with snow,
And his foot-marks black and damp,
And the ghost of the silvern Moon arose,
Holding her yellow lamp.

And the icicles were on the eaves,
And the walls were deep with white,
And the shadows of the guests within
Pass’d on the window light.

The shadows of the wedding guests
Did strangely come and go,
And the body of Judas Iscariot
Lay stretch’d along the snow.

The body of Judas Iscariot
Lay stretched along the snow;
‘Twas the soul of Judas Iscariot
Ran swiftly to and fro.

To and fro, and up and down,
He ran so swiftly there,
As round and round the frozen Pole
Glideth the lean white bear.

‘Twas the Bridegroom sat at the table-head,
And the lights burnt bright and clear —
‘Oh, who is that,’ the Bridegroom said,
‘Whose weary feet I hear?’

The complete poem is here.

Not being a Victorian, some of the words are unfamiliar, and not being a Christian, I’m not sure I understand all the symbolism…but what a vivid, beautiful, powerful poem.

Annual CTA Proposed Reductions


I knew it must be time for the annual “dance” regarding the Chicago Transit Authority budgets when I saw this sign up on a bus stop near the Merchandise Mart. The sign detailed the threatened cuts to bus routes if 1) the CTA doesn’t get more money 2) the unions don’t give back their recently negotiated pay raises.

This is no way to run a state. This article in the Chicago Tribune describes the annual ritual:

The CTA made an offer today that its labor unions could refuse, and they quickly did: Give back a 3.5 percent pay raise this year in return for reducing employee layoffs and major cuts in bus and rail service that are set to begin Feb. 7.

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