What's the Big Deal About Natural Gas, Anyway?

If you're a regular to The Motley Fool, you've probably been reading about the promise of natural gas for a couple years now. If digesting all that information is easy, this article isn't for you.

Instead, I hope to take what can be a bewildering topic and make it a little more digestible for the beginning investor.

Let's start at the beginning
We use energy every day. From heating up our coffee, to firing up our computer, and turning on the A/C on our drive to work, we have become reliant on cheap energy. For most of the 100-plus years since the Industrial Revolution, it's been pretty easy to extract the materials -- namely coal and oil -- that we need to continue living the way we do.

But like all nonrenewable commodities, the day will eventually come when oil and coal become increasingly scarce. As things stand today, here's how we generate our energy in America.

Source: Energy Information Administration, numbers for 2010.

As you can see, oil, natural gas, and coal account for 83% of our energy consumed. Most people have no problem figuring out where all the oil gets used, but they might get confused when it comes to the other two. Coal is used primarily for the generation of electricity, and also in the production of certain metals. Natural gas, on the other hand, has historically been a source of energy for utilities (cooking, heat, etc.) in residential and commercial properties.

Oil and coal have not been media darlings lately. You hear politicians talking all the time about weaning the country from foreign oil -- especially from the Middle East. And coal gets a bad rap for being dirty.

But those things didn't seem to bother anyone too much until the last decade. Wars in Iraq and Afghanistan didn't help, and concerns about global warming probably played a role, too. But natural gas' rise has less to do with the fall of oil and coal, and more to do with a process that's been refined and exploited over the past decade: fracking.

What the frack?!
Imagine that deep down in the Earth's crust, there's a pocket of natural gas that we could use, but just can't get to. Over the last 10 years, energy companies have solved the riddle and figured out how to reach that gas. The process involves drilling ultra-deep holes in the Earth's crust, shooting a liquid mix into rock formations at super-high speeds. This essentially "pops" the bubble holding the natural gas in, and it is collected as it exits the earth.

If the process worked as easy as it sounds, that'd be great. But many contend that fracking can contaminate water sources and even cause earthquakes. The debate over the safety of fracking is important, but that's beyond what this article is about. You can read more about the debate here.

What are we waiting for?
From an economic standpoint, the important thing to know about fracking is that it has led to an overabundance of natural gas -- pushing prices down to record lows. While ExxonMobil and Chesapeake Energy (NYSE: CHK  ) -- the nation's leading natural gas producers -- may not like that trend, it's a boon for consumers.

The No. 1 thing holding us back from using natural gas to power our cars and trucks is a lack of infrastructure. Westport Innovations (Nasdaq: WPRT  ) has already designed engines that can run on natural gas, but the problem is a lack of places to fill up.

Any small American town is likely to have more than one gas station, but it would cost billions of dollars to set up the same network of filling stations for natural gas. Clean Energy Fuels (Nasdaq: CLNE  ) is doing what it can, building out filling stations for long-haul truckers, but there's still a long way to go before natural gas can start replacing oil for our transportation needs.

Is this sustainable?
It's estimated that there's enough natural gas under American soil alone to power the country for the next 100 years. Though that's certainly encouraging, it is by no means a renewable energy source. Just like oil and coal, the day will eventually come when natural gas becomes scarcer.

Because geologists are pretty sure that day is pretty far off, natural gas has been increasingly viewed as a "gap resource." Over the next 100 years -- the narrative goes -- natural gas will buy our scientists time to develop the type of renewable energy that companies such as Solazyme (Nasdaq: SZYM  ) and Amyris (Nasdaq: AMRS  ) are busy researching right now.

Without a doubt, this article just scratches the surface of natural gas' story in America. If you'd like a primer on how to profit from the energy sector no matter what fuel will drive our future, I suggest you check out our special free report: "The Only Energy Stock You'll Ever Need." The company involved has roots in both the oil and natural gas industries. Get your copy of the report today, absolutely free.

Fool contributor Brian Stoffel owns shares of Solazyme and Westport Innovations. You can follow him on Twitter, where he goes by TMFStoffel. The Motley Fool owns shares of Westport Innovations, ExxonMobil, Chesapeake Energy, and Solazyme. Motley Fool newsletter services have recommended buying shares of Clean Energy Fuels and Westport Innovations. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On July 17, 2012, at 11:13 PM, kmacattack wrote:

    Although it might cost billions to duplicate all the gasoline stations in the USA, it will only cost $450 million to build out the 450 fill stations for natural gas fuel on the nation's interstate highway system. The bad news is that the refinery owner Koch brothers, and the big oil lobby have been able to convince Mitch McConnell to stall the energy bill for 18 months and then when the bill had the backing of 59 senators, including several republicans,McConnell blocked the 59 "Yes" votes with his filibuster in August of 2010. McConnell filibustered again in November after he publicly stated that "his goal would be to make Obama a one term president." and he intended to block ANY and ALL legislation backed by Obama or sponsored by democratic Senators. Immediately after McConnell filibuster, gasoline prices started climbing rapidly, because the big oil cartel and their partners in OPEC knew that they would not have to compete with natural gas as a transportation fuel if the Senate failed to fund through either a grant or a loan the minuscule amount needed to build the infrastructure. McConnell "saved" the government $450 million, but cost American taxpayers hundreds of billions of dollars by enabling the OPEC?Big Oil/ Koch Brothers cartel to continue to operate with no competition. Natural gas fuel sells locally for $0.98 to $1.11 per gallon equivalent., but if you need to take a long trip, you would run out of fuel before you traveled very far with no fuel stations on the route. Gasoline sells today for $0.11 per gallon in Caracas, yet it's about $3.40 here. Why is that? The oil companies keep telling us that there is only about 2 to 8 cents profit per gallon in gasoline. Are we supposed to believe that the Venezuelans are losing $3.20 per gallon or so for every gallon they sell AT COST to the Venezuelan people? If so, how does Venezuela afford universal health care with every citizen covered, at about 1/3 the cost of the US system, and excellent educational system which has now produced a more literate nation than the US, and managed to accumulate an $85 BILLION cash surplus?

    Earlier this year, the Senate again passed a watered down energy bill, with 53 votes, except Mitch McConnell was visited by the Koch brothers and their bags of cash in tow, and decided once again that America is better off importing OPEC oil, and paying the maximum amount the oil companies feel that they can steal from Americans for gasoline and diesel.

    The Kochs have more than 1 dog in this fight. As a refiner, the prospect of losing a sizable amount of their diesel and gasoline refinery business to a much cheaper, much cleaner burning natural gas fuel is not a pleasant thought. But this is only the tip of the iceberg, according to life long republican and energy trader T. Boone Pickens. Pickens says the Koch brothers have been behind McConnell's filibusters, because by killing the energy bill for the past 3 years, they have made TENS of BILLIONS in additional profits by driving natural gas prices to 20 year lows. The Koch's tentacles reach far and wide into such businesses as chemical and fertilizer manufacturing, Georgia pacific, toilet paper manufacturing, An Offshore gambling casino Chinese Whorehouse and a forced abortion clinic in partnership with the "Christian Coalition"

    McConnell had a little help in his decision to filibuster the energy bill. He was given "campaign contributions" totaling nearly $550,000.00 just before his filibuster of the energy bill in August of 2010 from the Koch Brothers, big oil, and the Coal lobby. So the Koch brothers continue to make tens of billions per year, big oil makes Trillions per year The coal lobby is holding on for dear life as power plants all over the country are converting from dirty coal power to clean power low CO 2 emission natural gas, so they will do anything to stop any bill which encourages any competing technology.

    This obstruction of alternative energy sources has nothing to do with political ideology, and has everything to do with our corrupt political system which has tentacles reaching on both sides of the political aisle.

    We need to enact IMMEDIATE REAL LOBBY reform. NO LOBBYING should take place behind closed doors, EVER. No more mail or e mail should be sent directly to congressmen. This is why we have C SPAN. All of the lobbying can be done in front of Americans on live TV. Equal time should be allocated to those with opposing views on any proposed legislation. No more "campaign contributions" should be paid to congressmen from any corporation or labor union. And, NO CONGRESSMAN should ever be allowed to leave congress and go to work for any company which does business with the government. This "revolving " door has been a large source of corruption and bribery. When a congressman receives a $1MILLION "contribution" from a lobbyist PAC "bundler", the effect of buying the vote of the congressman will often cost Americans hundreds of billions or even TRILLIONS of dollars.

    A couple of examples from recent memory are the case of the oil companies which jacked gasoline prices up from $0.79 per gallon to over $2.00 within a few months time in 2000 helped elect "W" Bush. There was a phony "shortage" used as the excuse when actually there was so much oil in this country at the time that every storage tank was full, and tankers were parked in the gulf of Mexico because there was no room for any more oil. The oil companies knew that the public would blame Clinton and especially "tree hugger" AL GORE for the price hike, "due to EPA regulations." Voters were actually stupid enough to believe that OILMEN Bush and Cheney would betray their biggest donors, and enact policies which would lower gasoline prices, after being loaned the Enron jet for a campaign plane and being given tens of millions in "donations"from the oil industry. Big oil and the Kochs finance republicans clear down to the state and local level. Wherever they believe they can buy a representative or governor, they will do it. When gasoline hit $4.00 per gallon within 5 years, the public wanted to know why, but with republicans in control of congress, they knew better than to "bite the hand that fed them."

    The same was true of the deregulated "Gangster Banksters" who nearly finished the job that the big oil companies started with their "casino game" derivative "credit default swaps."

    Now we know that the largest portion of Europe's financial woes were a result of the Incessant GREED of OUR "Too Big to Fail" Institutions. Europe would be "easy pickings", a wide open and untapped market for their "derivative" credit instruments.

    Goldman and JP Morgan were the big players in Europe and sold their recipe for financial calamity to Greece, Spain, Portugal,and Ireland. Hundreds of billions in commissions were paid to Goldman and JP Morgan brokers. If the deal made money, they made commissions. If the deal lost money, they made commissions. If the deal blew up and was "rolled over' into another debt instrument, they made more money again. These high risk "swaps" were supposed to greatly reduce interest costs on sovereign debt, but had the reverse effect.

    I wonder how many people remember the TV commercials from about 10 years ago which proclaimed "You can buy this $300,000 home for a payment of only $800 per month." A couple of years later, homebuyers were shocked to receive new payment books in the mail, with their "new payment" on their adjustable rate mortgage now escalating from $800 to $2,400 per month.

    And we are told that when millions of these loans began to default, this was totally the fault of home buyers who "should have known better" and should have "read all the fine print."

    This was the same crooked sales tactic, allowed by a "Laissez Faire" policy which led to the foreclosure crisis in the mid 1980's under President Reagan.

    There have been FIVE severe recessions (the last a near depression) during the republican administrations.

    This tangled web of mortgage failures, de regulated oil companies, $5.00 gasoline prices in 2007 and 2008, banks and investment companies ripping off their best customers, the Koch brothers and "campaign contributions" are all an interconnected prescription for economic calamity, just like they were in 1929 under Herbert Hoover, inventor of the Great Depression.

  • Report this Comment On July 18, 2012, at 9:33 AM, keninden wrote:

    As sad as the political impasse is, there have been some market-driven transitions which are actually favorable. Utilities have been transitioning to NG since 2006, with the fraction of coal-based electricity in the US dropping 50%, to where coal now accounts for 34% of US electricity. Though West Virginia miners blame this on Obama and the EPA, the trend started under the Bush administration and is due to the lower cost of NG, with the decreased need for pollution control equipment an added benefit. Remarkably, this is the primary driver for US carbon emissions being down 8% since 2006, twice the impact of the Kyoto agreement in the rest of the world according to a recent npr report (the audio version has more detail than the written one):

    http://www.npr.org/2012/07/14/156784701/miners-weather-the-s...

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