The Crude / Natural Gas energy price ratio hit a new all time high yesterday of 6.3 driven by the continued decline in the front month contract for natural gas at the Henry Hub (which closed today at $2.72/mmBtu for February delivery).  When you review the chart of the ratio from 1994 to the present it’s hard to miss the structural change in the market that started in the 2008 – 2009 time frame when shale gas has started to flow in quantity.



The oil gas ratio hit a new record high today with gas trading at $3.11/mmBtu and WTI going for $101.25/bbl yielding an energy ratio of 5.61.   In simple terms this means gas is  trading at the equivalent of $18.05/bbl crude.

The market is starting to notice this rapid shift in natural gas economics.  Back on Dec 10 I mentioned a few of the sectors, such as chemical processing, that would be likely winners due to lower priced gas.  Companies are now starting to announce their plans to build new plants.  Royal Dutch Shell PLC is planing an ethylene plant in the Appalachian region, Nucor is building a gas fired iron plant in Louisiana, Dow Chemical Co. is planning two new chemical facilities in the Gulf coast, and CF Industies is planning to boost its ferterlizer production made from gas.  (WSJ, 12/27/2011, A3) .  All due to relatively low gas prices.  If LNG importers are not able to “reverse to flow” and turn into LNG exporters, then the price of gas can stay low until domestic consumption has a chance to absorb these lower cost supplies.

One of the other sectors that should benefit from the relatively high oil/gas ratio is the CNG (compressed natural gas) transportation buisness.   In October I analyzed Clean Energy Fuels’ [CLNE] stock performance relative to the energy ratio and couldn’t really see any coorelation between the fundamental driver of their business (the oil/gas ratio) and their stock price.   Checking back today I’m still not seeing any sustained improvement in the company’s stock price.  So I’m still looking for the breakthrough in the transportation business.

In other news, shale gas is certainly affecting the price of electricity, both spot prices and prices offered for term contracts for renewables.   In the western US, on-peak spot prices in southern California today were $30.37 $/MWh….lower then they were 30 years ago in 1981 when our company ( started producing power.  And the natural gas based market reference price (MRP) used by the California PUC for evaluating renewable projects is off about 15% from the last MRP posted by the CPUC.

While this is happening the solar sector is having problems with oversupply and a softening market.  The oversupply is drivien by the rapid increase in Chinese production (including two IPOs in October and November – Changzhou Almaden and Sungrow Power).   Coupled with  German demand for 2011 reported to be 29% below 2010 levels two German producers, Solar Millennium and Solon SE filed for insolvency this month.  The supply/demand combination is also driving layoff such at those reported at SMA, Suntech, and First Solar.   And stock prices for solar companies, as measured by the solar ETFs KWT and TAN, have dropped by over 60% YTD and their market cap has fallen below the $70 million level that was related to me as a break-even size for an ETF.   In fact, all of the sponsors of sector specific ETFS –  KWT, TAN, FAN, PWND, GRID –  are losing money on their offerings if this is still the break-even number.  Which one will close up first like the progressive transportation ETF did in 2010?

How much of the market woes facing solar producers stems from gas competition?  I’m not aware of any analysis of the relationship of subsidies and RPS mandates to gas prices in the US, but reason tells us there must be some connection beyond a mere correlation of gas prices and solar woes.

I think this is just the start of the disruptions caused by low gas prices.  On a very small scale our company is affected in contract renewals and the prospects of lower electric prices/subsidies for new project development.  Many other businesses will be forced to adapt and potentially sooner then anyone expects.




It’s officially winter and Henry hub gas futures are below $3.20/mmBtu.  With WTI oil near $100 / bbl the oil/gas ratio hit an all time high today of 5.43.

On January 13, 1994 the ratio(*) of the price of oil to the price of natural gas was 1.14.   Today it hit a 17 year record high of 5.26.   Gas traded at $3.28 today, just 21% of the $15.38 / mmBtu it traded for on December 13, 2005.   Shale gas is providing gas in volume at moderate cost driving this record high price disparity.



IMO, the impact of moderately priced gas hasn’t been factored into energy policy to any great extent.   Nor has the balance of the energy market had time to react.  And the media hasn’t realized this is happening.

But there should be many winners – combined cycle generation, CNG vehicles, chemical processing that uses gas, and gas consumers.  Why isn’t there a stamped into new fleet conversions to CNG….it’s way cheaper than gasoline?

The will also be disruption, – coal, climate change strategies, and renewable generation will be impacted.   Why sequester carbon when you can replace a coal plant with a super efficient combined cycle plant and emit 50% less CO2?

My prediction for 2012 – renewable electric generation, and its subsidies, feels some competitive heat in the US.

(*) The energy price ratio is the price of crude on a $/mmBtu basis divided by the price of natural gas on a $/mmBtu.  The crude prices used are the front month NYMEX contract for WTI crude at Cushing Oklahoma.  The $ per barrel price is converted to $/mmBtu using 5.8 mmBtu / bbl.   The gas price used is the front month NYMEX contract for natural gas at Henry Hub Louisiana.

The California Air Resources Board today unveiled Advanced Clean Car Regulations aimed at reducing smog causing emissions and addressing concerns about global warming.  Somehow the ARB has concluded, in at least one scenario, that about 35% of of light duty vehicle in 2040 will be hydrogen fuel cell cars.  And when more than 10,000 of these cars are sold in an air basin the Clean Fuels Outlet regulation will require the construction of hydrogen fueling stations.   But don’t worry, “Staff projects that, with high station utilization, fuel providers will be able to sell hydrogen at an affordable price and realize a return on their investment within three to four years.”

In contrast, Exxon Mobil’s 2012 The Outlook for Energy: A View to 2040, doesn’t even mention hydrogen fuel cell cars playing a part in 2040.

The ARB apparently still remembers Governor Schwarzenegger’s Hydrogen Highway vision.  No one else seems to.


The clean energy sector continues to be treacherous for investors.  In my last update I had four coverage termination, one on the NASDAQ (Beacon) and 3 on OTC/venture exchanges.   As I have previously commented, the OTC/venture exchanges remain very risky.   There are more terminations to come in my next update as well as some new IPOs I’ll be following.

company_name post
Clean Energy Combustion Systems, Inc. Last traded 4/17/2011, web site gone.
IdaTech plc Company is no longer listed.
AE Biofuels, Inc. Trading stopped and turned into a shell.
Beacon Power Corp Filed Chapter 11 Bankruptcy on 10/20/2011

…the 5 year TIPS traded at an all time low real yield today of -1.047%.   The 10 year didn’t quite hit a record but it traded at a real yield of -0.64% .  The last time the TIPS yields hit a record low was on August 10, the day the DOW dropped 508 points.    In contrast, today the DOW fell a modest 61 points and is over 1000 points higher than it was August 10.   In August money was moving into the safety of US Treasuries driving down their yields and carrying the TIPS down with them.  Today, it looks like the ECB rate cut put pressure on Treasuries with a similar effect.   The TIPS may have lower to go still.   If inflation expectations click upward, and the central banks constrain nominal rates, then TIPS will go lower.  Amazing, a very safe way to lose money in real terms.

Shale gas is moderating gas prices in the US and is likely to have a profound effect on a number of industries.    In the clean energy arena, the top three energy sources being utilized by sustainable energy companies are solar, wind, and electricity.    Here are some thoughts on the competitive position of these areas. 

Wind and Solar

 The wind companies compete almost exclusively in the utility-scale, grid-connected market.  In the solar market, cells are used both inside the fence and increasingly for grid-connected utility-scale projects.   For inside the fence solar, cheap natural gas shouldn’t have a big competitive impact, at least for a while.  Most inside the meter projects get to offset tariffs without any standby charges.   Since tariff rates are built up from transmission charges, distribution charges, and generation costs it will be some time before cheap natural gas plants make a dent in tariffed rates.

It’s a different story for the grid-connected wind and solar projects.   While many states have renewable mandates, these mandates will have to stand up to the competitive pressures created by shale gas.  When you couple $4/mmBtu gas to a 61% efficient, super clean combined cycle (CC) plant, all in electricity costs are low.  In December 2010 EIA estimated that advanced CC plants had a levelized cost of 6.3 cents/kWh.   The energy component, which many night-time producing wind project compete with, is currently in the 2.2 cent/kWh range (yes, 61% is a 5593 Btu/kWh heat rate and gas is about $4/Btu).  EIA’s next set of estimates may be lower.

Electricity Using Technology

The are plenty of exciting things happening with the use of electricity.  LEDs, batteries, power electronics, energy management, and advances in HVAC are some of the bigger areas.   I don’t see any significant effect on these activities due to shale gas, unless tariff rates change substantially, which I don’t expect.

Oil Displacement

President after president has targeted our “oil addiction” with efforts to improve our energy independence.   To limited effect.   Currently 78% of oil is used in transportation and this 78% represents 39% of all energy use in the country.  Over half of this oil is imported creating economic and geopolitical problems.   Unfortunately, substituting other energy sources for oil in transportation has been largely ineffective.   In 2009 electricity provided 0.1%  of transportation energy, biomass 3.4%, and natural gas 2.6%  (Lawrence Livermore National Lab, 2010, LLNL-MI-410527).

But shale gas may have decoupled natural gas and oil prices and increased the competitive advantage of natural gas.    As shown below, from the mid 1990’s until 2008, crude oil, on an energy basis, has been 1 – 2 times the price of natural gas.   But since 2008, when shale gas started having an increasing impact on markets, gas prices have stayed relatively stable while oil prices have risen.  The result is crude is now over 3 times the cost of gas.  















So the obvious question is will natural gas’s share of the transportation market increase now that it has a significantly improved economic position?   If so it should be visible in sales of natural gas fuel and equipment for transportation.   Clean Energy Fuels Corp [CLNE] claims to be the largest provider of vehicular natural gas (CNG and LNG) in North America.  If any company should see an uptick from having its underlying competitive advantage increase, CLNE is a good candidate.   In their latest 10-Q, CLNE reports products and service revenue for the 6 months ending June 30 at $134 million, a 61% increase over the six months ending June 30, 2010.   This is an impressive increase consistent with underlying  fuel price movements.

Unfortunately, shareholders are not seeing a similar increase.   Over the same two periods the company’s Net Income (loss) went from $ (14 million) to $(15 million) in the 6 months ending June 30, 2011.   In the graph below while the competitive advantage of gas has increased significantly since 2007, the share price of CLNE has not tracked this dramatic market dynamic.   That said, I think this is an interesting area where a material shift has taken place in economics and I expect to see increasing market activity as a result.

Share price vs energy ratio changes

















disclosures: none


This sector defines investment risk.   Not only has Evergreen Solar, Inc. [ESLR]  filed for bankruptcy, investors in another high visibility solar developer have been saddled with a 72% loss over the last week.   In a massive shift that has to shake confidence in the company, Germany’s Solar Millennium AG [S2M.DE] announced on Thursday said it will convert the first 500 megawatts of its 1,000 MW Blythe solar power plant in the Mojave desert to PV. It will decide what technology to use for the second half of the project at a later date.  Nor has it revealed the charge it will need to take due to the shift.

It’s not just these companies.  The two solar sector specific ETFs [KWT and TAN] have lost 36.8% and 33.2% respectively this year.  This is about double the loss broad-based market indices have suffered and lead the losses across all the clean energy ETFs and mutual funds.    In fact these losses have depressed the size of the sector specific ETFs for wind, solar, and smart grid to where only the Guggenheim Solar ETF  [TAN] has a market cap greater than $100 million.  The other four ETFs market caps are below a rule of thumb $70 million threshold required for the ETF sponsor to make money.   So I wouldn’t be surprised to see some of these ETFs shut down like the clean transportation ETF [PTRP]  did last December.

That said, solar companies may be great technologists with good products.   With falling panel prices it looks like PV is on track to wipe out solar thermal projects and is making progress on being grid competitive.   Of course, in the US with natural gas prices constrained by the technological breakthrough that brought about shale gas, the bar for solar PV is being raised.  Whether solar can reach parity (and without the support of creative ratemaking that turns $4/mmBtu gas into 20 cents/kWh power in the summer) is still not answered.  But if so, solar companies with depressed stock prices may turn into good investments.

Disclosures:  none



Not only have yields declined on nominal US bonds but TIPs yields have hit all time record lows.  Five year TIPS now yields minus 0.84% (-0.84%) and the ten year TIPS yields zero.   That means the real rate of return on a 10 year AA+ rate security, with no inflation risk, is zero.  For taxable investors the real return is, of course, negative.

That said, the distortions continue to abound with the yield of AAA munis exceeding US Treasuries on all maturities up to 20 years.   When I compute the AAA / AA+ after tax yield curve munis come out ahead in all time buckets.