Media Doesn't Know Natural Gas From Gasoline

CNBC had an interview the morning with John Hofmeister, the former head of Shell's U.S. operations and now heading up Citizens For Affordable Energy.  The story on CNBC's web site that accompanied the video clip of the interview totally mixed up the impact of the falling drilling rig count in the U.S. with gasoline pump prices. 

The story starts with the claim that oil prices are low and will likely remain there for the next three to six months, but that we are at risk of an explosion in prices in the future.  Mr. Hofmeister commented that oil prices were about $50 a barrel and were supported by the weakening value of the U.S. dollar.  He didn't think that was going to change, but if it did, oil prices would go down.  But then the writer/editor quotes Mr. Hofmeister talking about the nearly 50% decline in the domestic rig count and that prices are going to stay down.  The problem the writer has is that Mr. Hofmeister's comments about the rig count and prices staying down were related to the natural gas market in this country.  Natural gas prices have fallen from aroung $13 per Mcf early last year to about $3.80 today, with most industry experts expecting them to fall further in the coming months.

About 70% of the U.S. rig count is directed toward drilling for new natural gas reserves, not oil.  What's happening in the natural gas market it not tied to the price of gasoline at the pump, unless one wants to say that it is all economically driven.  The downturn in the automobile and housing industries is having an impact on natural gas consumption.  Electricity consumption is down, also, but we actually benefitted from a colder winter that boosted heating-related natural gas consumption.  Unfortunately, just as we are experiencing lower gas demand we have created a huge increase in new natural gas production due to high gas prices over the past several years and new technology allowing us to extract natural gas from formations previously thought uneconomic.

What was lost on the writer/editor was that while oil prices are down due to the impact of the economic recession on oil demand, the world continues to operate at about 90%-95% of productive capacity, a margin of spare capacity that could quickly disappear with either a geopolitical event or a surge in demand related to a rapidly recovering economy, causing a spike in oil prices, and in gasoline pump prices, too.  For most consumers, the gasoline pump is their only interaction with the oil industry, and it is not a real measure of the value of the industry's product.  

After almost 40 years of dealing with media reps covering the energy industry, I remain dumbfounded by how little about the basics of the business they comprehend.  This is especially frustrating in Houston, home to the international oil industry.  My advice is to give little credence about what reporters write and say about the business world.