Boone’s Plan

Position: Short natural gas via the etf UNG

 

We recently shorted natural gas in our virtual portfolio, on the back of a supply and demand mismatch that we think will build in the intermediate term.  Longer term, though, there are some justifiable reasons to be bullish of natural gas.  T. Boone Pickens provides some interesting rationale for longer term demand for natural gas in the Pickens Plan.

 

Pickens prefaces the outline of his plan with the point that Americans are addicted to foreign oil, and on that point he is correct.  According to most estimates, the United States uses 25% of the world’s oil despite having only 4% of the world’s population.  Crude oil production in the U.S. peaked in 1970 (Hubbert’s Peak) at 9.7MM barrels per day, has been on steady decline ever since and is now producing less than 4.0MM barrels per day.  Clearly, the U.S. is running out of oil and is becoming increasingly dependent on foreign oil sources.

 

One of the primary solutions that Pickens, and many advocates of natural gas, offer for as a solution to the issue of foreign oil dependence, is an increased use of natural gas, particular for transportation use.  One on hand, Pickens is an investor who likely has a vested interest in promoting increased use of natural gas, but on the other hand there are some opportunities for natural gas to displace oil.

 

One example Pickens gives is that 20% of all the oil in the United States is used by 18 wheelers to transport goods around the nations.  Displacing that fleet, with a natural gas fleet, would have a meaningful impact on domestic oil demand.

 

In contrast to oil, the United States is rich in natural gas. In fact, both production and reserves of natural gas continue to increase in the United States.  The most recent estimates from the Potential Gas Committee, which is the authority that produces estimates every two years, suggests that the United States holds 2.1 trillion cubic feet as of the end of 2008, which is a 35% increase from 2006 (this fact is obviously bearish for price).

 

Globally, there are roughly ~10MM vehicles that use natural gas.  Most of the vehicles are located in five countries: Pakistan, Argentina, Brazil, Iran, and India.  In aggregate, this is a very small portion of the world’s vehicular population. There are more than ~800MM vehicles in the world currently, so natural gas is just over 1% of the market in focused regions with access to cheap natural gas.

 

In his recent State of the Union address, President Obama mentioned clean energy no less than 10x, and made the following statement:

 

“But to create more of these clean energy jobs, we need more production, more efficiency, more incentives.”

 

At the moment, President Obama likely has other issues to focus on, put the potential for incentives to support cleaner forms of energy are clearly being bandied about within the administration and it is likely that natural gas would be a recipient of some incentives, as it is a cleaner form of vehicular fuel than gasoline (formed from oil). Perversely more incentives for natural gas could actually mean a lower price as production should increase.

 

While in the longer term natural gas is a logical path for the United States to pursue to displace her dependence on oil and for clean energy purposes, the pathway to increased demand will be lengthy.  Setting aside massive government incentives, which could occur, we need to build a fleet of natural gas vehicles and an infrastructure of distribution.  Neither of which is likely to occur in the shorter term and will require massive investments and time.

 

While we applaud Boone’s efforts, we remain short Natty.

 

 

Daryl G. Jones
Managing Director