The Village Green

A blog about how Canadians can achieve energy independence by powering down and then powering up the right way.

“I’ll never get my money back; it’s too expensive”.  

Greg and I heard that again recently. I’m constantly amazed that people continue to think insulating their homes and buildings is too expensive. But it’s indicative of how we’ve been trained over the past decades. Energy continues to be astronomically cheap and subsidized both directly and indirectly. What’s more, the markets clearly don’t work.  

The markets don’t work? But doesn’t every MBA student in the country know markets are supposed to be efficient?

Maybe therein lies the problem. Theoretical abstractions repeated until mantra collide with this little thing called reality.    

Consider the energy news this week. Today, oil hit $74 a barrel (the highest price since last October), up 7% on the week. Meanwhile, natural gas prices are at their lowest level in 7 years, trading at less than $3 per million British thermal Units (BTU’s). 

It takes about 5.9 million BTUs (mmBTUs) of natural gas to produce the energy equivalent of one barrel of oil. This is a straight energy conversion using a standard unit of measure (BTUs).  A certain number of BTUs does a certain amount of “work” (i.e. move a car, run an engine, run a generator, heat a volume of water etc). This suggests that people – within some bounds – are going to be energy “agnostic” and will gravitate toward using the cheapest form of energy to accomplish a give amount of work.  

This assumption doesn’t work perfectly because there’s a fixed technology investment involved; you can’t just pull out your (oil) gas tank and convert your car to natural gas because natural gas is cheaper that week. However, historically, natural gas has traded in a fairly consistent range vis a vis the price of oil, with a barrel of oil priced at about an 8 to 10 times multiple on a mmBTU of natural gas.  

In other words, the current price of oil suggests natural gas should be priced in the $7 - $9 per mmBTU range. But today, it’s trading at $3. Either oil is over-priced or natural gas is under-priced. Or, the market isn’t anywhere near as efficient as people think.  

I think we’re going to see a whipsawing back of natural gas prices. The cost of extracting gas is going up and exploration has just about seized up in the past year meaning that when demand returns, supplies will be way down. Finally, liquefied natural gas is a disaster waiting to happen – kind of like a floating hydrogen bomb – and this risk has likely not been reflected in its costs.  

What does all this mean?  

It means insulate your house.  Now!

Trust me.

Gabriel Draven