Goodbye Oil, Hello Natural Gas! - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 4 February 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
In the summer of 2008, crude oil reached its highest price ever, peaking just under USD 150 per barrel. This was an incredible run, as the price had roughly tripled from 2005-2008. As the price was rising at the time, there was increased worry and concern about the negative impact of rising oil prices, and just how high they would go.

The logic worked as follows: The world is very dependent on oil, and demand is rising fast due growth in emerging economies. On top of that, supply was restricted due to ageing oil fields, and was likely to grow too slowly or even shrink at some point (a theory known as peak oil). Of course, these two combinations would surely lead to sky-high oil prices.

Many forecasters in 2008 were predicting that oil would likely reach USD 200 per barrel, and possibly up to USD 400 per barrel. From an investment perspective, a long-term play on a crude oil was very likely to be a big winner, given the fundamentals we discussed.

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What we did not count on was that something else could replace oil. Even if oil supply is stagnant over time, our demand for oil is unlikely to grow at high levels. So what exactly will replace oil in the long run? The answer is of course: Natural gas.

Natural gas is an energy source that is much cheaper, cleaner, and more abundant than crude oil. New discoveries and new drilling techniques (shale gas) are helping to make natural gas a more prominent source of energy. Demand for natural gas is growing rapidly due its advantages over oil, and this shows no signs of slowing down.

Already we can see the increasing importance of natural gas on our streets. Vehicles are increasingly being powered by natural gas, and this trend will increase over the coming years. The price of petrol will become less and less important in the long term.

So what does this mean from an investment perspective? For one, crude oil is unlikely to rise to astronomical levels in the future. In the short-term we are still very dependent on oil, so short term supply constraints will be an important factor. However, in the long term we are much less dependent on oil, so the price will be much more stable over a longer period.

Natural gas prices have come down significantly in the last few months due to continually increasing supply. As we mentioned, natural gas is an abundant resource, and its supply is forecast to easily keep face with demand growth. Thus, we can expect natural gas prices to be stable over a long period as well.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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5 Responses to "Goodbye Oil, Hello Natural Gas!"

whatsupprahalad

Mar 28, 2013

Ramanand ji:
true we are actually already experiencing post "Peak oil" economy.. Castor oil is a replacement for crude oil in chemical industry.. and India is the largest producer of castor seeds in the world.. Jayant Agro is the largest processor os castor seeds and castor oil derivatives in India..
In addition to the careful use of energy resources we need to look at the future jobs of the world.. which will be more related to agriculture ..

Like 

seetharam i

Feb 5, 2012

sir, low reserves in the world it is very dangerous to the human kind

Like 

B S MURTHY

Feb 5, 2012

Now the next priority for the Governments,Scientists, Technocrats, Entrepreneurs is to explore SOLAR ENERGY. They have to wake up and move ahead.

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Balakrishnan, R

Feb 4, 2012

Natural gas is no doubt a clean fuel. The problem with natural gas is transportation. As it is a gaseous medium, we need large pipe lines to make it available to to the user point. To make it popular for usage,the pipe line should run over streets as water lines. This needs a lot of investment.

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Ramanand

Feb 4, 2012

Natural gas is not quite as abundant as we might believe. The falling output from Reliance KG-6 basin wells is testimony to that fact. In most cases, experts tend to overestimate the amount of extractable gas from drilled gas wells.
Also important to note is the fact that even if available in an exact equal quantity as oil, Natural gas supplies will not last us very long. World energy demand is continuously growing, while any natural resource supply is limited.
We are at a major decision point in human civilization. Our last 300 years of industrial revolution fired by earth's natural resources is nearing its end. Unless we find alternative sources of energy such as Thorium (cleaner than uranium), human civilization is doomed to return to a more low energy consuming state (such as in the medieval times) with resources limited to only what the earth will renew over the limited time.
Natural gas can at best be a bridge fuel between today's oil dependency and the next generation of energy source. We must use NG very cautiously and judiciously, lest we run out of even this, causing a sudden dislocation in terms of economy and society.

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