As oil to gas prices ratio rises, what will be of crude oil prices?

The recent news from the Middle East and North Africa including the turmoil in Japan due to the tsunami attack (see here for more on these matters), have driven crude oil prices up as they are currently at well over 100$/b. On the other hand, natural gas prices didn’t react much to these news items and are at a low level compare to a couple of months ago – during the middle of the winter when demand for natural gas was high.

In the graph below is the ratio of oil and gas prices during 2010-2011.

The graph shows a few things:

1. Currently the oil and gas prices ratio is at an all time high: in fact, it’s at its highest level in over a decade;
2. there are cycles for this ratio with rises and falls: just in the same period last year was nearing a peak in this ratio before falling back during May 2010;
3. There is an upward trend in 2010-2011 in this ratio.

Crude oil prices clearly show a rise over natural gas prices, and also prone to more volatility as seen in recent months. This brings into mind why is natural gas’s price doesn’t rise over crude oil’s. There are ample reasons why natural gas is a more reliable energy source:

1. There are ongoing increase in production of natural gas mainly in the Middle East  – there is an estimated change of natural gas production to 15.7 trillion cubic feet
2. The recent natural gas discoveries in the US caused an estimated rise in its production to 4.166 trillion cubic feet ;
3. The ratio of oil to gas prices is high and might continue to rise as the uncertainty in the Middle East continues;

Nevertheless the transfer to natural gas as a prime energy source over crude oil is far from reach mainly due to one of crude oil’s prime sector: transportation.

Transportation

The transportation sector is second only to industrial sector as nearly 30% of the world’s energy use is for transportation. In 2009 energy use grew by an estimated 3.2%, partly because many non-OECD countries provided fuel subsidies to their dwellers. As the economic recovery will progress, it will further raise the energy use.

OECD energy use for transportation, on the other hand, declined by an estimated 1.3% in 2008, and by an estimated 2% in 2009. This is mainly due to the recent recession.

The EIA’s projection of growth among OECD countries in transportation is an annual estimated rise of 0.3%. At this rate the OECD countries are to reach back the 2007 levels of energy use only in 2020.

The main usage of crude oil is for transportation: According to EIA 2010 report, fuel consumption keeps on rising on global level by an estimated 1.3% annually. This is mainly attributed to the rise in non-OECD oil consumption for transportation. Many OECD countries mainly in Europe increase their public transportation which is using non-liquefied fuels (e.g. electric grids).

This goes to show that there is still heavy usage and an ongoing expected growth in demand for liquefied fuels for land transportation in developing countries not to mention air travel is still heavily relies on liquefied fuels. This will continue to keep crude oil prices along with its demand high.

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For further reading (in this site):

• Weekly outlook for 21-25 March
• The erratic behavior of oil prices – Weekly recap 14-18 March
• Japan’s turmoil aftermath – preliminary outlook