How to buy gas for a 33% discount (UNG)
- What’s in a barrel of oil?
- Solar, wind or…
- What to avoid at all costs
What is a barrel of oil?
A barrel of oil contains 42 gallons, and has the
energy equivalent of about 7 million British Thermal Units
(BTUs).
Not to get into too much of a science lesson, but one BTU is enough energy to heat one pound of water from 39F degrees to 40F degrees.
So we don’t care about whether that oil is in a barrel, in a pipeline, whether it’s black and sticky or light and sweet. We care about those 7 million BTUs. The energy is what we’re buying when we fill up the oil tank ahead of a long winter, or we gas up our cars to drive to work. It’s the energy that matters – and although oil, a stable liquid, tends to be a more convenient form of energy than say, a pile of electrons, a campfire or a bowl of oats – it’s the energy that we’re paying for.
I don’t know what kind of premium we pay for the convenience, but at some point, that convenience premium will get superseded by a variety of other, inarguably cheaper energy sources.
Some folks will tell you it’s solar – because solar is free, right?
Or maybe it’s wind, someday down the road – wind is about a good a bargain as the sun.
I fully believe that someday, years or maybe even decades from now, wind and solar technology will catch up with the needs of the industrialized world. But they’re not there yet.
One energy source that shares a variety of the good characteristics of oil now sells for a substantial discount to oil, and the infrastructure, technology and transmission for this resource are all at the ready.
I’m talking about natural gas.
And I know you’ve probably heard the talking heads on TV or the wonks in the mainstream media downplay the significance of natural gas. It’s super cheap, they’ll tell you, because of a huge glut of supply.
That’s when you should want to buy something: when there’s lots of it, and it’s cheap and the dummies on TV tell you to wait it out.
Let me show you how incredibly cheap natural gas is right now.
So remember that a barrel of oil contains 7 million BTUs.
Natural gas is sold in units of one thousand cubic feet (MCF). One MCF is equivalent to 1 million BTUs of energy.
So you might expect that one MCF might be 1/7 the price of a barrel of oil, strictly from an energy equivalence price – and it actually has cost that much (and less!) in the not so recent past.
Or you might expect to multiply the cost of one MCF of natural gas and have it be more or less equal to the price of a barrel of oil.
Obviously, you would have to factor in the relative convenience of oil (a stable liquid) over natural gas (a gas) – but what’s that convenience worth? I’m not sure.
Today, natural gas sells for about $4.20 per MCF.
Multiply that $4.20 by 7, and you get $29.40.
That’s less than a third the price of oil, on an energy basis.
And you can see that it’s not just cheap compared to oil today, but natural gas is relatively cheap on a historical basis. Below I’ve plotted a chart of the price of oil divided by the price of natural gas:
I don’t think oil is necessarily overpriced right now, so the only logical conclusion to arrive at is that natural gas is super inexpensive.
And yeah, it’s inexpensive because of new technologies and recovery techniques, but eventually the markets will respond to this cheap form of energy and will skew the ratio back towards 7:1
Even with oil’s convenience premium, there’s no good reason for natural gas to stay this relatively cheap for very long.
At least, I firmly believe that natural gas stocks will be sustainably profitable long before solar or wind stocks.
And I’ll be revealing some of my favorite natural gas investments in the coming weeks.
But right now I just want to warn you away from one natural gas investment to avoid at all costs: the United States Natural Gas Fund (NYSE: UNG).
This ETF does nothing but lose money, seemingly no matter what happens to the price of natural gas.
Take a look at this price performance chart plotting natural gas against UNG:
Natural gas prices are up 20% over the past two years, but UNG is down 60%.
If you believe higher natural gas prices are on the way, then you should avoid UNG at all costs.
Good investing,
Kevin McElroy
Editor
Resource Prospector
