Donald Marron, newly-minted head of the Tax Policy Center and a friend of Economics 21, has an interesting post on the relationship between the price of oil and natural gas. The relative price of natural gas has declined sharply over the last two years:

The unusual pricing of the last two years reflects two factors. First, there has been a dramatic–and welcome–expansion in domestic natural gas supplies. That’s driven natural gas prices down to less than $4 per MMBtu at yesterday’s close. Second, there is limited opportunity for energy users–utilities, businesses, and homeowners–to switch from oil to natural gas. Years ago, such switching linked oil and natural gas prices relatively closely. But today those prices appear largely decoupled.
All of which poses an important question for investors, forecasters, and industry planners: Will historical relationships eventually reassert themselves, perhaps by longer-term fuel switching by utilities and transportation fleets to natural gas? Or is this time really different, with old pricing relationships no longer relevant?

This is of particular interest to me because I’ve been following the much-hyped startup Bloom Energy, which Greentech Media recently cited as one of its top ten IPO candidates:

Bloom Energy has a great story, revenue from the sales of its Bloom Boxes and marquee customers including Cypress, Google, FedEx and San Francisco’s SFO Airport. The company’s Solid Oxide Fuel Cells (SOFCs) are an alternative to diesel gen-sets in the off-grid world and to the electric grid in the developed world. The fuel cells run on natural gas which, in the view of some, makes the value proposition fragile. But a strong team, veteran investors and a big narrative make this a firm to watch, profitability and value proposition notwithstanding.

Marron suggests that “the new normal, according to futures markets, will be for oil prices to average about 15 times natural gas prices,” which sounds like good news for Bloom Energy. MG Siegler of TechCrunch described the company’s SOFC’s in February:

Bloom Energy are producing tiny fuel cell boxes they call “Bloom Boxes.” Two of these can apparently power a U.S. home (and only one for homes in countries that use less power). So how small are they? Look at the picture above, each device isn’t much bigger than a standard brick. Of course, they need to be surrounded by a larger unit that takes in an energy source (such as natural gas). But still, these units look to be about the size of a refrigerator and can easily fit outside of a home, providing it with clean, cheap energy.
Currently, these boxes cost some $700,000-$800,000, but eventually, founder K.R. Sridhar envisions one in every home — and he thinks he can get the cost below $3,000 for a unit to make that happen. And he’s talking a 5 to 10 year timeframe for this.
Naturally, there are plenty who are skeptical of something like this ever working. There have been no shortage of fuel cell ideas over the years, but none get their own segment on 60 Minutes showing working units. And none get to highlight the fact that they’re already installed at companies like Google, eBay, FedEx and others. In fact, four of these Bloom Boxes have apparently been powering a Google datacenter for the past 18 months. eBay says their five boxes have saved them over $100,000 in electricity costs over the past nine months.

We’ll see. Bloom Energy certainly has enthusiastic and influential friends.

Rod Adams, an advocate of nuclear power, and small and medium-sized reactors in particular, has long been a scathing critic of the natural gas industry. He left the following comment at the end of a Wall Street Journal op-ed advocating increased use of natural gas:

How can a man with such deep interests in oil and gas not know that the very first gas well drilled in the United States – in 1821 – was a shale gas well and that we have known for many decades that there were vast areas of shale gas under the continental US. What we have also known is that getting to that shale gas and releasing it required a massive, costly drilling effort and some method of fracturing the tight formation so that it would release the gas. Heck, there was one time when people working on a program called Plowshares used an underground nuclear explosion in Colorado that was aimed at fracturing shale to release its gas. That happened in the 1960s!
The only thing that changed two years ago (the point that Deutch points to) was that gas prices finally got high enough so that drillers determined that getting shale gas out was WORTH the effort and the Potential Gas Committee began including a larger portion of the KNOWN resource as part of its report of “proven, probable, possible, and speculative” reserves. That determination is ONLY valid at high prices – if gas is cheap, the revenue that can be generated DOES NOT pay back the initial investment with enough return to make it worth the effort.
Fracing is not only environmentally damaging because of the massive effort required, it is also EXPENSIVE and not worth the effort to produce cheap gas. Deutch’s piece is severely misleading, almost in the sense of the way that any pusher tries to give potential addicts assurance that the product will not hurt and will be readily available at low prices into the foreseeable future.

In fairness, it is at least possible that the fracing process will quickly grow more environmentally sound and inexpensive, so Rod’s arguments aren’t necessarily an open-and-shut case against increased use of domestic natural gas supplies. But as always, he adds some needed perspective. And for the record, I also support more investment in SMRs, and a more streamlined regulatory process. Rep. Devin Nunes, one of the more impressive members of Congress, spoke to Kim Strassel about one promising approach in July:

Rather than throw federal loan guarantees at uncertain nuclear plants, the legislation attacks the true problem: bureaucratic roadblocks. It streamlines a creaky regulatory process, requires the timely up-or-down approval of 200 plants over 30 years, and offers new flexibility for dealing with nuclear waste. Mr. Nunes likes to point out that his nuclear provision alone would do more to reduce carbon emissions than any Democratic proposal in existence. And it would in fact create, ahem, green jobs. Imagine that.
The bill accepts the argument that renewables serve a purpose but can’t yet compete against traditional energy. It would divert all the federal resource royalties into a fund. Companies or individuals with proven renewable technology would take part in a reverse auction. They’d bid for government bucks; those that can produce the most megawatts for the least money win. Auction winners forego other federal handouts. And consider this: The more fossil fuel extraction, the more royalties (potentially hundreds of billions of dollars) available to boost alternative energy.

Though I like Rep. Nunes’s approach to nuclear, I think Glenn Hubbard and Peter Navarro have hit upon a better approach to encouraging renewable technologies in their new book Seeds of Destruction.