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In this assignment, I am required to write an analysis of the main forces driving the market for any specific product of my choice. For me to successfully complete this task, I have to first pick a product, one that I am interested in, discuss the long term forces driving demand and supply, discuss the position of the main substitute products and producers, look at past data and explain what has occurred to change the price and finally will the producer be profitable in the future?I have chosen Natural Gas. Natural gas is a vital component of the world’s supply of energy. It is one of the cleanest, safest, and most useful of all energy sources. Despite its importance, however, there are many misconceptions about natural gas. For instance, the word ‘gas’ itself has a variety of different uses, and meanings. When we fuel our car, we put ‘gas’ in it. However, the gasoline that goes into your vehicle, while a fossil fuel itself, is very different from natural gas. The ‘gas’ in the common barbecue is actually propane, which, while closely associated and commonly found in natural gas, is not really natural gas itself. While commonly grouped in with other fossil fuels and sources of energy, there are many characteristics of natural gas that make it unique.
Long-Term forces driving Supply & Demand
Demand for natural gas has traditionally been high. Demand for natural gas depends on the time of year, and changes from season to season. In the past, demand for natural gas has been relatively straightforward: demand was highest during the coldest months of winter and lowest during the warmest months of summer. The main driver for this natural gas demand is the need for residential and commercial heating. This has resulted in demand for natural gas spiking in January and February, and dipping during the months of July and August. While requirements for natural gas heating decrease during the summer months, demand for space cooling increases during this warmer season. Electricity provides the primary source of energy for residential and commercial cooling requirements, leading to an increase in demand for electricity. Because natural gas is used to generate a large portion of electricity, increased electrical demand often means increased natural gas demand. This results in a smaller spike in natural gas demand during the warmest months of the year.
Thus, natural gas demand experiences its most pronounced increase in the coldest months, but as the use of natural gas for the generation of electricity increases, the magnitude of the smaller summer peak in demand for natural gas is expected to become more pronounced. In general, there are two primary drivers that determine the demand for natural gas in the short term. These include: •Weather – as mentioned, natural gas demand typically peaks during the coldest months and tapers off during the warmest months, with a slight increase during the summer to meet the demands of electric generators. The weather during any particular season can affect this cyclical demand for natural gas. The colder the weather during the winter, the more pronounced will be the winter peak.
Conversely, a warm winter may result in a less noticeable winter peak. An extremely hot winter can result in even greater cooling demands, which in turn can result in increased summer demand for natural gas. •Fuel Switching – supply and demand in the marketplace determine the short term price for natural gas. However, this can work in reverse as well. The price of natural gas can, for certain consumers, affect its demand. This is particularly true for those consumers who have the capacity to switch the fuel upon which they rely. While most residential and commercial customers rely solely on natural gas to meet many of their energy requirements, some industrial and electric generation consumers have the capacity to switch between fuels. For instance, during a period of extremely high natural gas prices, many electric generators may switch from using natural gas to using cheaper coal, thus decreasing the demand for natural gas.
Changes in Technology
Technological innovation has equipped the industry with the equipment and practices necessary to continually increase the production of natural gas to meet rising demand. These technologies serve to make the exploration and production of natural gas more efficient, safe, and environmentally friendly. According to a Department of Energy Report, “Environmental Benefits of Advanced Oil and Gas Exploration and Production Technology,” released in 1999 and still one of the most in-depth analyses available as of 2012: •22,000 fewer wells are needed on an annual basis to develop the same amount of oil and gas reserves as were developed in 1985. •Had technology remained constant since 1985, it would take two wells to produce the same amount of oil and natural gas as one 1985 well.
However, advances in technology mean that one well today can produce two times as much as a single 1985 well. •Drilling wastes have decreased by as much as 148 million barrels due to increased well productivity and fewer wells. •The drilling footprint of well pads has decreased by as much as 70% due to advanced drilling technology, which is extremely useful for drilling in sensitive areas. •By using modular drilling rigs and slimehole drilling, the size and weight of drilling rigs can be reduced by up to 75% over traditional drilling rigs, reducing their surface impact. •Had technology, and thus drilling footprints, remained at 1985 levels, today’s drilling footprints would take up an additional 17,000 acres of land. •New exploration techniques and vibrational sources mean less reliance on explosives, reducing the impact of exploration on the environment.
The structure of the natural gas industry has changed dramatically since the mid-1980’s. In the past, the structure of the natural gas industry was simple, with limited flexibility and few options for natural gas delivery. Exploration and production companies explored and drilled for natural gas, selling their product at the wellhead to large transportation pipelines. These pipelines transported the natural gas, selling it to local distribution utilities, which in turn distributed and sold that gas to its customers. The prices for which producers could sell natural gas to transportation pipelines was federally regulated, as was the price at which pipelines could sell to local distribution companies.
Change of price
Prices of natural gas vary throughout Europe. One of the main objectives of the projected single EU energy market is a common pricing structure for gas products. Europe’s main natural gas supplier is Russia. Since the major pipelines pass through Ukraine there is an ever arising dispute on the supply and transition prices between Ukraine and Russia. During the negotiations in 2008 Ukraine proposed that the price of natural gas for Ukraine should increase by $21.5 to $201 per 1,000 cubic meters, and the transit fee by $0.3 to $2 per 1,000 cubic meters pumped 100 kilometres (62 mi). Gazprom proposed that Naftohaz should buy its natural gas at $250 per 1,000 cubic meters starting from 2009.
Prime Minister of Russia Vladimir Putin said that the $250 per 1000 cubic meters price was a “humanitarian gesture” to Ukraine considering that Russia buys gas from Central Asia for $340 and that the European price level is $500 per 1000 cubic meters. Later, Naftohaz said it was ready to pay $235. Negotiations between Gazprom and Naftohaz were interrupted on 31 December 2008. While Gazprom claimed that Naftohaz would not negotiate, Ukraine said that the negotiations were interrupted at Gazprom’s initiative.
Three Future Trends in Natural Gas Prices
Prices will rise due to three major trends, causing a demand increase to meet this oversupply…
•Trend #1: Utility Customers Lining Up
While the natural gas producers are bemoaning the lower prices, electric utilities are lining up to buy. Nearly every new plant to come online in 2010 and 2011 uses natural gas as its primary source of fuel.
Historically, the only power plants that used natural gas as a fuel were peaking plants. Those are generators that utilities turn on only during peak times of energy use. They’re expensive to run, and utilities pay top dollar for the natural gas they use. More recently, utilities are converting old, dirty coal-fired power plants to run on much cleaner burning natural gas. These are big, base load power plants, online all the time. That allows utilities to negotiate long-term lower priced contracts for the gas they burn.
•Trend #2: The Growing Aversion to Nuclear Power
Ever since Three Mile Island and Chernobyl, nuclear power has been on the back burner in the United States. The newest (and only) plant under construction by Southern Company doesn’t have an operating license yet, and probably won’t go online for at least a decade. After the Fukushima disaster in Japan, plans for new nuclear power plants were either shelved or delayed all over the world. While Japan rebuilds, it’s relying heavily on natural gas and other fossil fuels. Meanwhile, countries around the world are reassessing nuclear power plant safety. Germany announced it’s getting completely out of nuclear by 2022. And New York Governor Cuomo is adamant about shutting down the Indian Point nuclear plant, just north of New York City.
All this generation capacity will have to be replaced by other sources, and natural gas is the fuel of choice.
•Trend #3: The LNG Shortage
Nearly every gas import terminal in the country (there are nine of them) applied for permits to install natural gas liquefaction plants. The reason? The demand for natural gas is booming just about everywhere else in the world. Qatar, the world’s largest exporter of natural gas, will soon hit its full annual export capacity of 77 million tons, in the face of global demand that can absorb nearly as much as the world can produce. In the wake of the multiple disasters in Japan, it’s importing an additional four million tons over the next year from Qatar. It’s in negotiations to purchase even more.
Future prospects of natural gas
According to current projections we have a maximum of 50 years’ worth of petroleum reserves left. That means that in the next five decades our lives may change dramatically. We will no longer have one of the most important resources responsible for the industrialization and modernization of our global society. We have relied on it to run our ships and airplanes, heat our homes, fuel our cars, carpet our floors, clothe our bodies, brush our teeth, and wax our surfboards.
In short, thousands of industrial, domestic, and recreational petroleum applications may not be possible in the coming century. Now that we are dependent on this finite resource in every realm of life, we may soon have to relinquish it. Clean energy from renewable sources like the wind, sun and ocean waves, while promising, are likely to take several years before they reach a critical mass. An alternative for investors to consider is natural gas. Yes, natural gas is a fossil fuel, but it does offer the advantage of having a cleaner reputation than oil.
Will natural gas be profitable?
There are many factors in which shows that Natural Gas is a profitable product, for example, it is an ever-growing product, one that is hardly used. One might say the transporting of Natural Gas is very expensive. The best way to improve the problem of natural gas oversupply is to increase its export. The most economical way to export natural gas is to liquefy it; this type of natural gas is called LNG. In its liquid state natural gas takes up 1/600 of its normal volume, making it ideal for export. In conclusion, I have successfully analysed the main forces driving the market for any specific product of my choice, which I chose Natural Gas.