EnergyGlobal Oil and Natural Gas Shortage Sets the Table for Higher Prices Across the Board

While production tries to catch up to rising demand, the prices for Texas' most valuable commodities are jumping to levels not seen in years.
October 12, 2021
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Facing a supply shortage, the prices for oil and natural gas are reaching new heights. The price for West Texas Intermediate crude oil eclipsed $80 per barrel (bbl) for the first time since 2014, before the federal export ban was lifted.

Then, as now, lacking supply placed upward force on the trading price. But back then, the federal government had explicitly cordoned off a large segment of global demand, prohibiting the export of domestic oil supply.

This time around, demand is recovering while supply struggles to catch back up. It caused gas prices to inch closer to $3 per gallon as summer travel picked up significantly. Production in the Permian Basin is ramping back up to its pre-pandemic levels, but it’s not there yet.

Texans have the luxury of being closer to the point of production for petroleum, which means the product is generally cheaper for consumption, whether it’s gasoline or natural gas electricity use.

But when ripples are sent through the supply chain, proximity does not immunize against all effects.

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Natural gas prices are rising substantially due to short supply as the market tries to adjust after last year’s volatility caused by the pandemic. It weathered the storm better than oil since its demand did not evaporate overnight, but with business operations shuttering and individuals staying home more, natural gas’ electricity generation shifted some.

Additionally, shippers are redirecting shipments, sometimes multiple times, to the highest bidder which is placing a premium on the current supply and driving up the price.

And other countries that do not have a robust domestic natural gas production, such as India, China, and those in Europe, have begun stockpiling the product for the winter which then affects the availability of supply exchanging hands — further driving the price up.

Jason Modglin, president of the Texas Alliance of Energy Producers, told The Texan, “In the United States, Americans are somewhat insulated from these global shocks due to our domestic production but have seen the price of gasoline rise about $1.50 since January, natural gas more than double in price and inventories remain tight throughout the year.”

The market for both commodities adjusted to the lower demand that led to massive global supply gluts, highlighted most notably by the oil futures price plunging to -$40 per bbl in April 2020.

“Eventually we will hit a ceiling and the market will correct, but in the meantime, Texans will continue to see the cost of goods and services rise,” Ed Longanecker, president of the Texas Independent Producers & Royalty Owners Association (TIPRO), told The Texan.

Natural gas accounts for about half of the state’s electricity generated for its power grid, and so a rise in those prices will cause a noticeable increase in utility bills. Luckily for Texans, winters tend to be milder than up north but if another cold snap occurs like happened back in February, then pocketbooks could take the hit more than usual.

Additionally, with oil being the base product for the gasoline needed to transport other goods, those increased prices will bleed into essentially every other product. 

Longanecker pointed to another contributor to the price rise, though a prospective one: Congress is considering a federal methane tax aimed at curtailing flaring of the gas from energy companies.

He added that the supply shortage “would be exacerbated by the current Administration’s rush to move away from reliable sources of domestic energy, very similar to what’s playing out in Europe.”

The added costs that would accompany a methane tax, Longanecker stated, would lead to serious consequences for some in Texas. “In certain areas in Texas, low-income households pay up to 28 percent of their monthly income to cover their energy needs.”

“Even a slight increase in energy prices could force families to choose between their groceries or keeping the lights on.”

Economic forecasters take policy into account when projecting prices down the road and the White House’s policy is unambiguously part of that.

President Joe Biden set a goal to reach carbon-neutrality in the U.S. by 2035, but has recently adjusted that to 2050, and has taken actions to reign in the nation’s oil and gas industry — such as his torpedoing of the Keystone XL pipeline and the federal land drilling moratorium.

“As a consequence of this ‘race to the top’ in climate investments,” a White House release reads, “the clean alternatives in sectors across the economy may start looking more like the cheap alternatives in the power sector today, thus helping to ensure the country is poised for deep emissions cuts in the future.”

The policies are part of a broader plan to incentivize development of, and increase reliance on, renewable sources of energy. A similar undertaking occurred throughout Europe over the last few decades. The foremost example is Germany, which relies heavily on biomass to support its volatile renewable generation. Biomass energy is generated by burning mainly wood, which itself emits carbon dioxide; Germany emits about twice that of France which relies far more on nuclear power.

But in an odd turn, at the same time the Biden administration has explored ways to decrease domestic oil and gas production, it requested that OPEC ramp up its production to provide more balance to the global market.

Modglin warned, “These pressures [caused by the shortage], which are hampering economic recovery from COVID, are running headlong into a destructive policy agenda both here and abroad that promises to further raise energy prices.”

In Texas, its renewable footprint is growing while large portions of natural gas and coal capacity is shuttered. But the effects of this transition expand far beyond Texas’ power grid.

“We are seeing the very real consequences of demonizing and discounting hydrocarbons and their necessity for modern life,” Modglin added.

“Without them we risk human safety and will have less agricultural production, fewer scientific and medical breakthroughs, and stop material advances to make things lighter, stronger; setting aside all the other benefits like taxes, jobs, and capital paid for by the oil and natural gas industry.”

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Brad Johnson

Brad Johnson is an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.