May 26
Evidence of innovation
A lot of people have been talking about the need for innovation. It's easy to think about about inventions that haven't been made yet, and new trends that have a noticeable impact on industry sometimes get looked over by people who are worried about the lack of innovation. The extraction of natural gas from shale is an important new technology*. Extraction of natural gas from shale has increased 14 fold over the last decade. Before this widespread implementation, natural gas in the US was going to get very expensive. Now, projections by the EIA find that the United States' net imports of natural gas will shrink to 1% in 2035 from 11% in 2009.
This isn't necessarily the innovation that people want. At the 2011 Ira Sohn conference, Jim Chanos discussed how cheap natural gas was killing the ideas of wind and solar power as economically viable enterprises. Natural gas will be seen as an old technology, and people complaining about the lack of technological innovation might opine about how alternative energy hopes are mere pipe dreams. If they do, it should be pointed out that these pipe dreams are being crushed by innovation in an older sector setting too a high a bar for the newer technology.
There are still concerns about this method of extracting natural gas. James Hamilton at Econbrowser points out how these natural gas wells are getting methane into drinking water. These negative externalities need to get worked out, but overall the new production technology has been driving down the price by enough that the benefits should vastly outweigh the costs.
The chart above gives some idea of the benefits. The orange line is crude oil, while the white line is an average of the first 12 natural gas contracts. Natural gas has seasonal price movements, so it is better to look at the average of the contracts over a year rather than a generic front month contract. Note how the new supply coming online from shale gas helped natural gas decouple from crude oil and prices stayed low despite the economic recovery.
*It was developed a while ago, though the technology is still relatively new. There has been some learning by doing, and perhaps more importantly, new reserves found where the technology is applicable.
