Sunday, June 01, 2014

What are the Risks of Relying on Natural Gas for Power Generation?

Here are some data on time trends in natural gas prices.  Keep in mind that these are nominal units and the EIA doesn't bother to tell you which units!  Here is the graph starting in January 2002 and moving ahead one month at a time.

From basic supply and demand,  if the world chooses to leave its coal in the ground and to substitute to natural gas for generating electricity and if world electricity demand sharply increases, then how high will natural gas prices rise?  What does the world supply curve for natural gas look like?      Here are some insights from MIT's energy researchers.

Given the reliance by households on natural gas for cooking and heating,  could there be a significant increase in the expenditure by middle class households to provide basic household services?   The key counter-factual here is what the price of natural gas would have been had coal still been a permissible fuel to use for making electricity.  So, look at the figure above. Will it become much more volatile and upward sloping with the new rules that President Obama is now implementing?   As other nations also transition away from coal, what happens to the mean and standard deviation for operating expenses for urban households and firms as they seek heating and cooling services?