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Kelly Evans: Nat gas is the new oil

CNBC's Kelly Evans

If the 20th century was the era of oil, is natural gas the key fuel of the 21st?  

One reason why nat gas prices continue their parabolic spike right now is that it's the easiest replacement for coal as countries are under pressure to reduce emissions and, in China's case, deliver on their promise of "blue skies." Which is to say that unlike oil, which powers transportation, natural gas provides electricity--it literally keeps the lights on, and it provides heat for schools, businesses, and roughly 40% of U.S. homes.  

And in fact, electricity itself is also now a substitute for driving fuels like gasoline. So if we were dependent before on natural gas, we'll be extra dependent now, since nat gas also powers around 40% of the U.S. electric grid. Every EV sold today that isn't 100% powered by renewables will increase demand for natural gas at the expense of oil. Think about the massive global implications of that! Roughly 20% of cars sold in China as of August were already EVs. In Germany last month, that hit 29% (including plug-in hybrids)! 

Point being, oil demand looks set to peak before natural gas demand will, and oil is much easier to substitute. All you have to do is drive an EV and, at least in the U.S., your household demand for gasoline disappears overnight (okay, except for the lawn mower). This is why the likes of oil trader Pierre Andurand expect oil demand to peak by around 2027--if not sooner, now that oil prices are back up to around $80 a barrel. The last time oil prices were this high, in late 2014, Exxon was one of the world's most valuable companies and shares were trading in the $90s. Today, its shares are around $60, it's been kicked out of the Dow, and its market cap is a third of Tesla's.  

Substituting away from natural gas is a tougher challenge--it's literally piped into my house. Google "how to replace natural gas heat" and you have some options like using electric heat pumps, or, as many who live in the country already know, propane, but they're not that feasible for much of the dense U.S. population. The country is likely to rely on nat gas for heat for awhile, even as renewables continue to make inroads in powering the electric grid. The situation in Europe is even worse, as their nat gas production has plunged, nuclear is being phased out, and they're left relying on German pipelines or vying for global LNG shipments and being outbid by Asia right now. 

Cannily, Russia anticipated all this. Lest their geopolitical power be undermined by falling demand for oil, the country has quickly become a top natural gas supplier and now a crucial one for Europe. Just this morning, European natural gas prices were soaring again--to the tune of 40% in the U.K.--when Russia finally stepped in, reportedly promising to increase shipments, and prices reversed lower.  

And in the longer run, the U.S., which is also one of the "big four" global producers, along with Qatar and Australia, should be able to step in and fill the supply gap. It's exactly why natural gas prices have been frustratingly low for producers and investors in the space for the last decade. And it's why our prices, while they've doubled from a year ago, are still a fraction of what Europe is paying. What's more, the U.S. trade balance and GDP should hugely benefit from global demand for our liquefied nat gas exports.  

The real problem comes if both investors and policymakers push harder to move away from U.S. nat gas production. If nothing else, this winter should be a reminder of the perils of doing so.  

See you at 1 p.m! 


Twitter: @KellyCNBC

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