Rig Count Falls With Gas Prices

Rig Count Falls With Gas Prices
Rig Count Falls With Gas Prices
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And while we're on the subject of falling gas prices, one other outcome has been that gas is so abundant drillers have stopped looking for it. Right now the marginal price of gas is around $3.50 per thousand cubic feet (mcf). Five years ago it was $11. Fracking is expensive and the market price of gas is now below the marginal costs for drilling new wells. So companies such as Chesapeake Energy, the nation's second-largest driller, are pulling their rigs out of the Marcellus and Utica Shales in Pennsylvania and Ohio and redeploying them to drill for oil in the Bakken Shale.

The graph shows how closely the two factors have tracked each other over the past year. The horizontal axis represents quarters from April 2011 to April 2012. The vertical axis measures two things. The solid blue area represents natural gas prices per 1 million BTUs from $2 to $5, with the values calibrated on the left. The black line measures the number of rigs that have been deployed, from 600 to 1000, with the scale on the right.  As you can see, the two have fallen in tandem.

One thing to remember about such graphs is that they have been scaled to make the fit seem as close as possible. If drilling rigs had been measured from zero to 1500, for instance, the curve wouldn't conform so closely to the price of gas.  But the choice of scale is fair in this instance because it narrows the focus in a way that highlights the correlation. 

What this means is that the development of gas is being modulated and resources are being conserved for future use.  The price mechanism keeps natural resources from being overdeveloped. When supplies are abundant, owners and producers hold back expecting to get a better price in the future. It is only when the government interferes with these markets mechanisms through by mandating or subsidizing overproduction that natural resources are squandered.

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