Why is such a precious commodity falling in value

Yes, we did say fall. With all the commodity headlines centered on gold, oil and silver spiking in price over the past few months, natural gas has received little attention. Natural gas prices have fallen 24% in the last three months and more than 47% over the last year. This could be one of the biggest stories of the year. Why? The life of any economy is based on cheap energy and the decline in natural gas prices bodes well for our long-term economic success. Natural gas also is considered a clean burning fossil fuel that is supported by most environmentalists.

Natural gas prices have fallen for two main reasons:

1) Drop in demand. Demand for natural gas is lower today than it was 10 years ago. Part of the drop is attributable to the slow down in the economy. Most of the drop, however, is due to the fact that we have become more efficient using alternative sources of energy. As a result of the increase in energy prices over the past several years, businesses have retooled their factories and machinery to become more energy efficient. Home appliances are also more energy efficient today. Driving to Chicago on Route 65, after one passes West Lafayette (home of the Boilermakers!), the switch to alternative energy can be seen in the miles of windmills lining the highway. Solar panels, windmills, and hydro-electricity all have reduced our needs for natural gas.

2) Increase in supply. The supply of natural gas has exploded in the United States. The two main reasons for this is are more productive rigs and new drilling techniques allowing us to retrieve natural gas out of shale deposits. Technology has improved the productivity of natural gas rigs such that they are capturing more than twice the amount of natural gas than projected just a few years ago. Because of these techniques, the expected life of our reserves of natural gas has risen dramatically over the past few years from 33 years to over 100 years. The increase in supply along with falling demand is a double whammy for natural gas prices.

What this means for the US economy

Back in the day when half the world was communist, we could afford to charge higher taxes and be less efficient. Why? Because the taxes we paid would still be less than the effective 100% tax rate in communist countries. Those days are long gone as the world openly competes for business and customers. With the fall in the US dollar, the fall in natural gas prices and our huge supply of natural gas, the US is becoming much more competitive for manufacturing plants and for business generally. Contrary to what you hear out there, the US is not dead and we could be on the verge of an economic boom that would create jobs and get us out of our economic doldrums. We are competitive with our low energy costs and the low value of the dollar. However, our corporate tax rates are holding us back. We have the second highest corporate tax rate in the developed world and our current rates are higher than most of the developing world. If we lowered corporate tax rates, the US would be even more competitive and we would recover at a much quicker pace.

Sincerely,

Your THOR Team