Imagine, for a moment, that the price of cherry pits just hit a record high.
Demand is strong around the country, and the pits are selling for more than they have ever sold for before. BUT at the same time, the price for cherries is plummeting. Sure, a lot of customers still want them, but there is already a glut of the fruit on the market, with more stockpiled in the silo. (Cherries don’t go in silos, but bear with us.) Suddenly, cherries are cheaper than Chiclets. One cherry expert even says that, with the prices they get for pits, some farmers could give the cherries away for free.
It would raise an obvious problem: How do you cash in on the pits, without sending more cherries to market? Now swap natural gas for cherries and propane (and ethane) for pits, and you have a dilemma that is dangling before the industry. Not a perfect analogy, and there are other pressures on the natural gas side. But this is true: Natty gas is selling for less than a third of the price it got in 2008, while retail propane prices are the highest in history. And since propane is a natural gas byproduct, you can’t tap the liquids without getting the gas.
Jon Wolff, oil and gas analyst at Credit Suisse Securities, said most of the independents [energy companies] have a strategy focused on oil or natural gas liquids for the year ahead as companies from EOG to Devon to Chesapeake plan to cut capital expenditure on gas. US capital spending in gas across the sector is to be down 12 per cent this year despite an overall rise of 8-10 per cent in capital expenditure with the focus on liquids, he said.
Yet complicating this attempt to reduce gas production is that the liquids production results in “associated gas” that rises with the liquids. The US is literally overflowing with gas. Too bad Congress and the Obama Administration cannot see that it is in the nation’s best interest to encourage its use.
Now what does that mean for propane and natural gas this year? If we knew that, we’d be typing this on a solid gold computer with a ruby-encrusted mouse.