The EIA has a good piece out today:
“Substitutability between oil and natural gas in the industrial and electric power sectors meant that natural gas prices were bound, to a certain extent, on the high side by the prices of distillate fuel, typically priced at a premium to crude, and on the low side by residual fuel, typically priced at a significant discount to crude. In this environment, changes in the price of crude oil, reflected in both distillate fuel and residual fuel oil prices, were generally accompanied by a parallel movement in natural gas prices. From 2000 through 2005, the ratio of the crude oil price in dollars per barrel (bbl) to the U.S. natural gas price in dollars per million Btu (MMBtu) averaged about 7:1.
Of course, both historically and in today’s market, deliverability and storage constraints generated intermittent episodes of extreme movement in the ratio of oil prices to natural gas prices…Starting in 2006, however, the relationship between oil and natural gas prices began to change. At that time, the price for crude oil began to increase, pushing residual fuel oil prices higher, but the price of U.S. natural gas didn’t rise with it. If end users had the capability to switch from residual fuel oil to natural gas, they did it then. For example, switching was documented in electric generation in the Northeast and in Florida. But instead of prices moving back into alignment as natural gas consumption expanded, with the exception of a brief period in late-2006, the spread persisted.
As natural gas supply increased from 2006 through the first half of 2009, lower natural gas prices meant that oil-to-gas fuel-switching opportunities were fully utilized. With natural gas supply continuing to grow, the crude oil to natural gas price ratio jumped to an average of nearly 11:1. In June 2009, the ratio was a whopping 18:1, the highest it has been since October 1990. Indeed, with natural gas prices currently in the $3 to $4 per MMBtu range, efficient natural gas generation can now compete effectively for economic dispatch against coal-fired generation in parts of the Southeast even though natural gas generally remains somewhat more expensive than coal on a Btu basis.
The shift in focus from fuel-switching on the margin between natural gas and oil to fuel-switching on the margin between natural gas and coal illustrates a major market shift…it is increasingly apparent that the markets for crude oil and U.S. natural gas are now responding to different drivers. Whereas the market for crude oil is unquestionably global in nature, the natural gas market remains highly segmented. Asian demand and OPEC supply may be key factors influencing the current crude oil market, but they have little bearing on the natural gas market in the United States.”
It seems like a compelling argument for switching to natural gas as the fuel for a number of applications.