Price decline at the pump could mean price increase at the thermostat

Source: The Cleveland Plain Dealer

CLEVELAND, Ohio — It’s happened. Oil and natural gas prices are linked once again — as they were before the shale gas boom.

Here’s how it is happening.

Shale gas and oil wells have driven down the prices of both fuels, and $80-a-barrel oil could make some producers think twice about continuing to drill for more oil.

That is what happened earlier when producers pulled out of “dry gas” shale plays and concentrated their drilling rigs in regions where they had a better chance of finding oil or “wet gas,” a reference to ethane and propane that are found in natural gas fields and which are worth more than the mostly methane gas use for heating.

But the oil and wet gas wells have also produced large amounts of dry natural gas, helping to keep commodity gas prices below $4 per 1,000 cubic feet or 1 Mcf.

Falling oil prices are now putting pressure on oil producers, as well as gas producers, say some analysts.

“Some analysts (but not all) believe that oil pricing sustained below $80 per barrel will chop off the top of the crude oil production growth curve in North America. Pricing for oil is closer to the $80 per barrel mark than it has been in years,” wrote¬†Christopher McGill, an economist and managing director of policy analysis with the American Gas Association in the AGA’s Oct. 30 edition of its publicly available “Natural Gas Market Indicators.”

“Some analysts believe prices will stay down from pressures exerted by other producers trying to push unconventional producers in North America out of the market,” he explained.

And that could help reduce the enormous volumes of natural gas now being produced — 70 billion cubic feet a day — because a lot of that gas is flowing out of oil wells.

“Gas production associated with oil has grown beyond original expectations,” McGill wrote, “due not only to the shift of investment from natural gas to oil targets, but that the ratios of gas to oil in so-called oil wells has simply been more gas productive than anticipated in many cases.”

The price of oil at noon Friday was just over $80, and prices in future moths were $79 and change.