There are numerous articles which describe the ‘energy problem’ and go on to describe how we can reduce oil imports by building windmills and how natural gas discoveries mean that our energy problems are solved. In reality, there are now two very separate energy markets and a misunderstanding of their relationship can lead to disastrous investment consequences.

When we turn the pages of time to the 1970s, there was a rule of thumb then that the ratio between the price of a barrel of oil and a thousand cubic feet of natural gas should be roughly 10 to 1. Oil and natural gas were substitutes for many applications in the energy sectors (including the generation of electricity and space heating) and, if prices diverged from the ratio significantly, the less expensive fuel would be substituted for the more expensive fuel and the prices would finally move back to the 10 to 1 ratio.

Over the next two decades, natural gas gradually displaced oil in more and more of these shared markets. In the United States, there is very little use of oil to generate electricity. Natural gas has also replaced oil as a heating fuel in many markets and the markets where oil is still used are generally markets in which it would be expensive to build the infrastructure necessary to get gas into the markets.

As a result, the ratio no longer holds. In recent years, the ratio has moved up to the 25-30 to 1 level, making oil much more expensive than its counterpart on a British Thermal Unit (BTU) equivalent basis. In the past months, the ratio has climbed to levels near 40 to 1. We have lots of cheap gas, but it doesn’t make oil any cheaper at all.

As the price gap between the two energy commodities to increase, the economic benefits of substituting natural gas for oil become greater and greater. Since oil is used almost exclusively in the transportation sector, this substitution will have to take the form of using natural gas, directly or indirectly as a transportation fuel.

Analysts have also pointed out that there are other opportunities to displace oil-especially outside the USA. In places where oil is still used to burn the midnight oil, it is difficult to replace the existing commodity immediately as it will take years to modify the system in which the energy is utilized. But as the years are added to life, a day may come whereby natural gas would be supplied to our homes to meet our energy requirements. We will be await that day!