by Complete Growth Investor

Economist John Maynard Keynes said — and CGI paraphrases — that the market may remain irrational longer than you can remain solvent. Man, oh, man — or dude, oh, dude, or bro, oh…whatever — that’s natural gas. The explosion — not literally, thankfully — of so-called unconventional shale gas exploration and production in multiplying plays (see chart below), was first thought to benefit all these companies no one had heard of. Now, however, it has produced such a supply overwhelming demand that, at this moment, the spot price is circa $2.50/mmbtu, closing in on the $2 average for years when it was government regulated.

In fact, with the rest of the world’s major players paying high prices for shale gas acreage, U.S. producers, in some cases, are real estate companies rather than gas producers. Kinda.

Rational people say that the principles of Economics 101 have not been repealed and, eventually, price signaling will lead some to stop producing at a loss — those, that is, who can switch from more expensive fuels to the cheaper natural gas. Then, pricing can come back to rationality, and both affordability for the consumer and profitability for the producer will occur. What about the hedges at higher prices — hedges that keep some companies from death and destruction? They are rolling off. But then, they have been.

All of this could take a very long time.

CGI won’t solve this issue today, no doubt. Rather, from time to time, given that we are both capricious and busy, we’ll note the progress of indicators here and there. Experts already know this stuff. But most of you — and us — need someone to distill it for us. We will attempt not to distill moonshine.

Shale gas, shale gas, everywhere

First, the problem. Shale gas, shale gas, everywhere, courtesy of the Energy Information Administration:

Whole lotta shale gas shakin’ goin’ on.

Prices plummet chart

Is today’s dip below $3/mmbtu simply both shale gas oversupply and recession-reduced demand, bound to return to balance, or is this something longer term — what we, in investing land, call secular?

We don’t know. The natural gas drilling rig count is substantially down year over year, according to BakerHughes, but it’s not clear where the remaining rigs are going. Could it be to cheap natural gas? Or more lucrative wet gas — still plenty of natural gas, but also gas with liquids such as propane? That would keep supply too high for better pricing.

Price hikes could come from exporting natural gas as liquefied natural gas to countries that pay $11/mmbtu (this won’t happen for at least several years); growing the number of compressed natural gas-fuelled vehicles (see city buses, Utah, and T. Boone Pickens); or conversion of coal or oil-fired plants to natural gas. (We have absolutely no idea how substitution works here economically, but we do know that, sooner or later, hedges roll off and prices actually work and companies invest in stuff that is cheaper).

But when? And can the low-cost producers, the Contango Oil & Gas (NYSE: MCF) and Ultra Petroleum (NYSE: UPL) and others of our nation, survive?

More capriciously, but soon.