With the price of gas now trading at a record low - one third that of oil (per unit of energy) - its hold over the price of its hydrocarbon cousin should be its strongest ever. Yet oil prices have not only resisted gas' gravitational pull but have moved in the opposite direction over most of the year.
And with good reason.
To be sure, there is room for substitution between the two fuels. When natural gas is cheap relative to oil, it encourages petrochemical producers to switch from crude to natural gas feedstocks. And it encourages households to switch from burning oil to burning natural gas to heat their homes. Cheap natural gas also encourages utility companies to switch from generating oil-fired electrical power to natural gas-fired power.
But what it doesn't do is encourage operators of cars, planes, trucks, railways and ships to switch from oil to natural gas. Not that they wouldn't want to do it at today's prices if they could, but unfortunately natural gas can't be used as a transport fuel. And over 60 per cent of all the oil burnt in the world is used precisely for this purpose. On top of that, almost 90 per cent of the growth in world oil demand every year comes not from the need for home heating oil or for chemical feedstocks, but from demand for gasoline, diesel or jet fuel, for which there is no substitute.
How sustainable today's low gas prices are remains to be seen. While the advent of shale gas has changed the supply equation, we have not stress-tested today's prices over a full cyclical rebound in the demand for natural gas from either industrial users or power-generating plants, let alone through a bitter-cold winter. Until we do, it's premature to herald a new era of cheap and abundant gas.
But even if today's natural gas prices are sustainable, they are no more likely to bring down oil prices in the future than they are today. The reason natural gas can't substitute for oil as a transit fuel is that oil packs four times the energy density that natural gas does (think gas tanks roughly four times as large). And while it's possible to raise the energy density of natural gas by liquefying it, you need to cool it to -162 degrees Celsius to do so, which requires a tremendous amount of energy. And even then, liquefied natural gas is still only 60 per cent as energy-dense as diesel fuel or gasoline.
Until we can find an economically efficient way for natural gas to pack a far greater energy punch, all the shale gas in the world won't stop oil prices from getting back to triple-digit range.
Jeff Rubin