Natural Gas Prices and the Economy
Stephen Brown Federal Reserve Bank of Dallas Oil Prices and U.S. Recessions
Index, 1982=100 150
120
90
60
30
0 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 Natural Gas $/MMBtu Natural Gas Prices Rise Sharply (Henry Hub)
13.00
11.00
9.00
7.00
5.00
3.00
1.00 1997 1998 1999 2000 2001 2002 2003 Billions of Cubic Feet Natural Gas Inventories Rising 3500 Minimum and Maximum During Each Prior Five Years
3000
2500
2000
1500
1000
500 Inventories
0 1999 2000 2001 2002 2003 $/ Barrel Oil Prices Elevated 37.00 WTI
32.00 Futures prices October 17, 2003
27.00
22.00
17.00 OPEC Basket Price
12.00
7.00 1998 1999 2000 2001 2002 2003 2004 2005 Oil Natural Gas $/Barrel $/Mmbtu Natural Gas & Oil Prices Decouple 13.00 90.00
80.00 11.00
70.00 Henry Hub 9.00 Spot Prices 60.00
7.00 50.00 Futures prices October 17, 2003 WTI 40.00 5.00 Spot Price 30.00
3.00 20.00
1.00 10.00 1997 1998 1999 2000 2001 2002 2003 2004 2005 Quadrillion Btu
160 U.S. Energy Use to Rise
140 Historical Projections Other Nuclear 120
Coal 100
80 Natural Gas
60
40 Petroleum 20
0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Range of Potential Natural Gas Prices Natural Gas Prices
• Most Likely to Remain Elevated Relative to Crude Oil Prices • The likely range is $3.50-6.50 per million Btu (Henry Hub) • The most likely range is $4.50-5.00 per million Btu. US Rig count, $/mmbtu (sa) Natural Gas Prices Boost Drilling 1100 10.00
1000 9.00
8.00 900
7.00 800 Rig Count 6.00 700 (Natural Gas) 5.00 600 4.00
500 3.00
400 Natural Gas Price 2.00 (Henry Hub) 300 1.00 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Higher Natural Gas Prices Hurt Other Economic Activities
• Petrochemicals • Fertilizer Producers • Aluminum Producers • Electric Utilities • Their customers Classic Supply Shock
Labor
Capital Production Process Output Energy Classic Supply Shock
Labor
Capital Production Process Output Energy Aggregate Economic Effects
Economy-Wide Aggregation of Classic Supply Shock An Unfavorable Supply Shock
Input Scarcity (Higher Natural Gas Prices)
GDP Growth Slows & Productivity Growth Slows
Price Level Rises Wage Growth Slows
Interest Rate Rises Unemployment Rate Rises Estimating the Aggregate Effects of Higher Natural Gas Prices
• Natural gas prices about 45 percent above historical relationship with crude oil prices • No empirical research on the economic effects of natural gas price movements • US GDP reduced by 0.2-0.8 percent • GDP deflator increased by about the same • Very slightly gain in interest rates Natural Gas Prices and Economic Activity
• Natural gas prices likely to remain high relative to crude oil prices • Higher natural gas prices will act as a slight drag on U.S. economic activity • Effects uneven across industries and regions of the country