- Money Morning Australia

Natural Gas to Rule the World

Written on 27 November 2012 by Dr. Alex Cowie

natural gas flame 220×220

Back in the swinging sixties, Liza Minelli famously sang, ‘money makes the world go round’.

She had it all wrong. It’s not money – it’s cheap energy that makes the world go round.

Cheap energy means cheap transport, cheap manufacturing, and cheap food – all of which translate to higher living standards.

In fact, this makes cheap energy important enough for a nation to fight for.

So when oil started to get harder to find in the US in the middle of the twentieth century, they started a sixty-year long campaign to dominate the Middle East and secure its energy.

This has caused most of the major conflicts in the region in the last half century. But maybe, finally, the worst is behind us…

The Shale Gas Revolution in America

You may have heard of the US shale gas revolution.

Shale gas production employs a drilling technique that gives drillers access to previously inaccessible energy sources.

In under ten years, shale gas has gone from nowhere… to comprising a third of the US natural gas market.

In fact it has been so successful that the price of US natural gas has fallen out of bed and into the basement, from $15 to less than $4.

75% Fall in the Natural Gas Price in Seven Years

75% Fall in the Natural  Gas Price in Seven Years

Source: StockCharts

The monumental effects of this will take years to filter through.

For one thing, it’s creating a tidal wave of employment in the US industry at a time when jobs are hard to come by. A cheap source of energy could also make US manufacturing more competitive once again.

And the impacts of this cheap energy will spread globally as well.

For one thing, the US will gradually stop beating up the Middle East for their energy, as it becomes less dependent on this source. (Although the US-Israeli relationship means peace in the Middle East is still a distant dream.)

Another important effect will be a drop in price for other energy sources, like coal and uranium, as natural gas displaces them.

To start with, many hydrocarbon fuelled power stations in the US have already switched from coal to natural gas over the last two years.

Now that natural gas costs are down 75%, and likely to stay down, it made sense to switch the power stations over to gas. Natural gas is an environmentally friendlier fossil fuel too, so it means less pollution compared to coal.

You can see the effect on the US power mix in this chart. In under two years, use of natural gas as an energy source has almost doubled from providing 70 million Megawatt/hours – to 130 million Megawatt/hours.

It’s suddenly very close to being the US’s dominant source of electricity:

The United States – Cooking on Gas

The United States - Cooking on Gas

Source: soberlook

This is a phenomenal change in a short period, and is great for the US.

Coal and Uranium Getting Kicked in the Guts by Gas

However the change in the status quo is having all sort of knock on effects elsewhere.

For one thing, the switch to natural gas is creating a coal surplus which is hitting the seaborne markets.

This is part of the reason that the price of coal from Newcastle has fallen from around $120 this time two years ago, to recently plunge under $80 / tonne.

At a time that lower Chinese demand is having an effect as well, the US switch to natural gas isn’t helping the Australian coal industry.

You wonder if Treasurer Wayne Swan included that in his calculations for the mineral resource rent tax, or his budget projections…

And with the US sitting on at least a century of shale gas, this is not a market driver that will pass quickly.

Uranium has been in the dog house since the Japanese earthquake and nuclear power accident at Fukushima.

The uranium spot price had been holding well around $52 / lb for a year or so.

But six months ago it cracked.

And since then, spot uranium has plummeted as low as $40 / lb.

The uranium spot market is only a short term indicator for uranium, as most is traded through long term contracts. But all the same, it’s a good bellwether for what’s going on.

And right now, it’s looking pretty bleak. Part of this is due to the Japanese government turning increasingly against nuclear power.

But I think cheap natural gas as a competitive source of power in the US (a major uranium user) is also part of the picture.

The chart above shows a very slight pullback in nuclear power production this year.

If this is the start of the same trend we saw for coal, then it’s another kick in the guts for uranium.

This is all bad for the status quo, but great for the industries leveraged to the new guard. So it’s essential for investors to stay up with the story.

Dr Alex Cowie
Editor, Diggers & Drillers

PS. Leverage is a great way to boost your returns. You can either use margin lending to trade big blue-chip shares, or you can use the method I prefer – buying and selling small-cap stocks for big gains. It’s also a method favoured by your regular editor, Kris Sayce. Keep an eye on your inbox later this week for a notice from Kris about the greatest Australian you’ve never heard of, and how he used risk and leverage to create enormous wealth…

From the Port Phillip Publishing Library

Special Report:
Retire Rich, Happy and Free From Money Worries

Daily Reckoning:
The Aussie Dollar Dilemma

Money Morning:
Will Australian Banking Scandals Rock the Economy in 2013?

Pursuit of Happiness:
Revealed: The UN to Watch Over You on the Internet

Diggers and Drillers:
Why Shale Gas Could Be Your Investment of the Decade

Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au

Comments are closed.

FREE INVESTMENT REPORT: The Top 5 Oversold Blue-Chip Stocks in Australia

These five Aussie stocks all have something very powerful in common…and it could see them bounce up in the coming weeks and months. For all the details download this report right now.

PLUS you'll get Money Morning every weekday...absolutely free.

Enter your email address below and hit the 'Claim My Free Report' button now.

Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

WWD dvd

World War D was billed as ‘the biggest investment summit of the decade’

It didn’t disappoint…

Absolutely mind-blowing beyond my expectations

– D.A.C. Hall

contrary to mainstream economic reporting.

– L. Sceresini

Exciting, dynamic, passionate, informative, challenging, so professional... Brain-stretching.

– D Finlay

Click here to watch
the brand new Highlights Reel.

Openx pos2

  • ^NDX4066.273-6.904 - -0.17%
  • ^FTSE6805.80-24.86 - -0.36%
  • ^AORD5621.300-27.600 - -0.49%
  • ^AXJO5624.400-26.800 - -0.47%
  • AUDUSD=X0.9357
  • USDJPY=X103.689

Openx pos3

Diggers and Drillers

After three years in the doldrums…

Aussie resource stocks
are now a raging BUY
The last time resource stocks traded this low we saw a two and a half year rally that saw them gain 124%...
Now they’re getting ready to do it again. Read on to discover why…and three tiny Aussie miners that could explode up many times higher than that in 2014…click here.

Openx pos4

Openx pos5

Openx pos6

Openx pos7

Openx pos8

More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Many Australian investors are turning to alternatives. Led by the SMSF crowd, investors are piling i [Read More...]

I wanted to know what Joe Hockey would do about the hundreds of millions of dollars the government. [Read More...]

This morning the Australian dollar trading for 93 US cents. It hasn’t managed to regain parity since [Read More...]

The government plans to force internet and telco providers to keep your digital information (metadat [Read More...]

So much money is fleeing China…that it is distorting the global economy, particularly in the art mar [Read More...]

Stocks up, growth down. So what has happened in the world economy during the last 10 years to make s [Read More...]

The presence of such a huge amount of debt inhabiting the global financial system tells you that muc [Read More...]

‘Turbo Caps’ are the profitable, or soon-to-be profitable small-cap stocks that are about to pay or [Read More...]

The government in China can do a lot of things, but it can’t bring animal spirits back. This has gra [Read More...]

Some small-cap investors punt away aimlessly for years and end up without much to show for their eff [Read More...]


"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery