A New Focus on Natural Gas

1. Free Slides fromEd Dolan’s Econ Bloghttp://dolanecon.blogspot.com/Technology, Environment, and the Future of Natural GasPosted Feb 24, 2010 Terms of Use: You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishers. Check Ed Dolan’s Econ Blog regularly for more slides like this.

2. A New Focus on Natural Gas • Natural gas has long been one of America’s leading domestic energy sources • In the 1980s, gas production slipped to third place behind oil and coal • Now it is making a comeback—by the end of 2009, it was in a virtual tie with coal, and rising fast Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

3. The Role of Technology Technology is part of the reason. New methods have increased production of “unconventional” gas from sources once thought impractical to tap • Methane from coal beds • Gas from shale formations • Tight gas from hard rock formations • Gas from very deep wells Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

4. How Does Technology Affect the Market? How does new technology affect the supply and demand for natural gas? • Does the demand curve shift? If so, show the new demand curve as D2 • Does the supply curve shift? If so, show the new supply curve as S2 • Show the new equilibrium price as P2 Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

5. The Effect of Technology (Answer) • New technology reduces production cost and shifts the supply curve to the right, from S1 to S2 • The demand curve does not shift • The market moves along the demand curve to a new equilibrium at P2 Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

6. Low Carbon Content Helps Drive Demand • Concern about climate change has also been a factor in the rising popularity of natural gas • Natural gas produces significantly lower carbon emissions per unit of energy produced (Btu) than do other major fossil fuels • New regulations and incentives encourage use of natural gas Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

7. How does low carbon content affect the market? Starting from price P2, how do incentives and regulations that encourage low-carbon fuels affect the market? • Does the demand curve shift? If so, show the new demand curve as D3 • Does the supply curve shift? If so, show the new supply curve as S3 • Show the new equilibrium price as P3 Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

8. The effect of low carbon content (Answer) • Pressure to switch to low-carbon fuels shifts the demand curve to the right, from D1 to D3 • The supply remains at S2 • The market moves along the supply curve S2 to a new equilibrium at P3 Question: How do we know whether gas prices will rise or fall when both the supply and demand curves shift to the right? Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

9. The result so far: A net decrease in gas prices • Other things being equal, the technology-driven shift in supply tends to push the price of gas down • Other things being equal, increased demand for low-carbon fuel tends to push the price of gas up • In the recent past, the supply curve has shifted by more than the demand curve, and gas prices have trended downward • If economic recovery speeds growth of demand, a stronger demand shift could cause gas prices to rise again Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/