Comparing the price of oil to the price of natural gas requires looking at various cost factors. For oil, drilling and refining add to the cost. For natural gas, distribution is a major cost factor. Before large natural gas deposits were found within U.S. borders, oil and gas were similarly priced, but with increased supplies, natural gas is currently less expensive than oil.

Features

Energy supplies correspond directly to demand. When oil demand increases, prices rise and oil companies generate greater cash flows, allowing for more expensive exploration and drilling endeavors, which in turn produce greater supplies. The sector putting the greatest demand on oil is transportation (cars, trucks, airplanes, tanker ships); no other viable fuel source is currently available to power mobile sources. As for natural gas, U.S. supplies are plentiful to meet current and increased demand for industrial, utility and heating uses.

Considerations

Production and distribution factors affect the price of both natural gas and oil. As described, oil prices must remain high enough to sustain risky exploration and drilling projects, because easily accessible supplies have already been tapped. Difficult-to-reach supplies can require offshore drilling in waters at depths of 5,000 feet or greater and injection of fluids into reservoirs to increase pressure so that oil rises to the surface. Oil must be refined, whereas natural gas can be tapped and transported to market without refining. It should be noted that most of the recently discovered natural gas supplies in the United States require hydraulic fracturing and horizontal drilling to produce, and both techniques are more expensive than those previously implemented.

Significance

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Heating residential homes is the one sector in which both oil and natural gas are used, especially in the northeastern United States, making an easy price comparison. According to the Energy Information Administration, in the winter of 2008-2009, in the 6-month period October through March, average household costs for natural gas heating were $866; the average household costs for heating oil were $1,622. Heating oil is about two times more expensive than heating with natural gas.

Potential

Oil sands are a new development in the oil supply picture. These sands are a mixture of sand, clay, minerals and bitumen, a heavy oil used that can be rinsed from sand and refined into fuels. Recent discoveries in Alberta, Canada are likely to produce 178.6 billion barrels of crude oil. The sands lie near the surface, offsetting production costs. Additionally, the oil sands, being near the U.S. border, bring down distribution costs for oil-thirsty drivers. In coming years, oil prices may drop while oil supplies continue to meet demand.

Expert Insight

Newly discovered supplies of oil and natural gas will realign prices symmetrically. Oil sands are a new prospect in the global oil picture. Excluding a carbon tax on all types of fossil fuels, supply and demand forces will guide prices for these energy commodities in the near future; however, right now, natural gas is less expensive than oil.