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A New Focus on Natural Gas

Explore the resurgence of natural gas production in America, driven by innovative technologies and environmental concerns. Learn how new methods are affecting supply and demand, with a focus on low carbon content. Understand the implications for market equilibrium and pricing trends.

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A New Focus on Natural Gas

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  1. Free Slides fromEd Dolan’s Econ Bloghttp://dolanecon.blogspot.com/Technology, Environment, and the Future of Natural GasPosted Feb 24, 2010 Terms of Use: You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishers. Check Ed Dolan’s Econ Blog regularly for more slides like this.

  2. A New Focus on Natural Gas • Natural gas has long been one of America’s leading domestic energy sources • In the 1980s, gas production slipped to third place behind oil and coal • Now it is making a comeback—by the end of 2009, it was in a virtual tie with coal, and rising fast Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

  3. The Role of Technology Technology is part of the reason. New methods have increased production of “unconventional” gas from sources once thought impractical to tap • Methane from coal beds • Gas from shale formations • Tight gas from hard rock formations • Gas from very deep wells Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

  4. How Does Technology Affect the Market? How does new technology affect the supply and demand for natural gas? • Does the demand curve shift? If so, show the new demand curve as D2 • Does the supply curve shift? If so, show the new supply curve as S2 • Show the new equilibrium price as P2 Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

  5. The Effect of Technology (Answer) • New technology reduces production cost and shifts the supply curve to the right, from S1 to S2 • The demand curve does not shift • The market moves along the demand curve to a new equilibrium at P2 Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

  6. Low Carbon Content Helps Drive Demand • Concern about climate change has also been a factor in the rising popularity of natural gas • Natural gas produces significantly lower carbon emissions per unit of energy produced (Btu) than do other major fossil fuels • New regulations and incentives encourage use of natural gas Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

  7. How does low carbon content affect the market? Starting from price P2, how do incentives and regulations that encourage low-carbon fuels affect the market? • Does the demand curve shift? If so, show the new demand curve as D3 • Does the supply curve shift? If so, show the new supply curve as S3 • Show the new equilibrium price as P3 Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

  8. The effect of low carbon content (Answer) • Pressure to switch to low-carbon fuels shifts the demand curve to the right, from D1 to D3 • The supply remains at S2 • The market moves along the supply curve S2 to a new equilibrium at P3 Question: How do we know whether gas prices will rise or fall when both the supply and demand curves shift to the right? Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

  9. The result so far: A net decrease in gas prices • Other things being equal, the technology-driven shift in supply tends to push the price of gas down • Other things being equal, increased demand for low-carbon fuel tends to push the price of gas up • In the recent past, the supply curve has shifted by more than the demand curve, and gas prices have trended downward • If economic recovery speeds growth of demand, a stronger demand shift could cause gas prices to rise again Posting P100226 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

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