Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / How Cheap Natural Gas Is Reshaping US Power Markets
Transcript
- Lucas: Oil is up nearly 10 percent in the last five days — WTI crude closing at $79.13 — and Brent flirting with $85. But natural gas? Down 4 percent on the week, trading around $2.89 per MMBtu. That's a striking decoupling, and I think it tells us more about where the US economy is headed right now than the oil spike does. Luna: Gas is falling while oil is surging — that's not the usual pattern. Usually they move together, at least directionally. What's driving the split? Lucas: The oil story is geopolitical, plain and simple. The Strait of Hormuz toll proposal — even though President Trump abandoned the 20 percent protection fee today — the uncertainty alone has added a risk premium. But natural gas is a domestic story. The US produces more gas than any country in history, and storage levels are well above the five-year average. We're swimming in the stuff. Luna: So while the rest of the world worries about tanker traffic in the Persian Gulf, the US is sitting on a cushion of cheap molecules. Lucas: Exactly. And that has real consequences for power markets. The Henry Hub price — that's the benchmark — has averaged about $3.30 over the past year. But when it dips below $3, as it has this week, it changes the economics for every utility deciding whether to run a gas plant or a solar farm. Luna: Cheap gas squeezes renewables. I mean, ICLN — the clean energy ETF — is basically flat on the week, down a tenth of a percent. Meanwhile XLE, the energy sector ETF, is up 2 percent. The oil companies are having a moment, and solar stocks can't catch a bid. Lucas: Right. Enphase is actually up 4.6 percent over five days, but that's a bounce from a brutal stretch. First Solar is slightly negative. The broader clean energy index hasn't participated in the oil rally at all. And the reason is straightforward: when natural gas is this cheap, the economic case for building new solar or wind capacity weakens. You don't need a 20-year power purchase agreement at $30 per megawatt-hour when you can get gas-fired power delivered at $25. Luna: But that's a short-term price signal. Carbon emissions are a long-term liability. Aren't utilities supposed to be thinking about the next 30 years? Lucas: They are, but they're also responding to the next 30 days. The average utility CFO is looking at a gas price that's been below $3.50 for most of 2026, and they're asking: why build a solar farm at a higher upfront cost when I can buy a combined-cycle gas turbine, burn cheap fuel, and meet my near-term renewable portfolio standards through offsets? It's not environmentally optimal, but it's rational. Luna: And it's not just electricity generation. Cheap gas is also making LNG exports more competitive globally. The US is now the largest LNG exporter, and that creates a floor under domestic prices — but only if global demand holds up. Lucas: Right. The arbitrage is real. European gas prices are still three to four times US prices, so American producers have every incentive to ship LNG overseas. But that also means domestic prices are no longer purely domestic — they're tied to global supply and demand. If a cold snap hits Europe next winter, Henry Hub could spike. Luna: So the decoupling we see today — oil up, gas down — could actually snap back quickly if the weather turns. Lucas: It could. But there's another angle to this that I think is underappreciated: the role of AI data centers. New York just became the first state to impose a moratorium on new AI data center construction, citing concerns about electricity demand. Those data centers are massive power hogs, and they were expected to drive a surge in natural gas consumption. If other states follow New York's lead, that could cap gas demand growth. Luna: That's a fascinating twist. The AI boom was supposed to be a tailwind for gas — and for renewables, too. But if regulators start blocking data centers, the demand story changes. Lucas: Exactly. And it ties back to the structural story we've been following for months. US oil production growth has hit a wall, but gas production is still expanding. The Permian Basin produces a lot of associated gas — gas that comes up with oil — and even if oil drilling slows, that gas keeps flowing. So you have this ongoing supply glut that keeps prices low, while the demand side gets more complicated. Luna: Let's look at the coal side. Cheap gas has already pushed coal to the brink. The EIA expects coal-fired generation to fall below 10 percent of the US total this year. That's down from about 50 percent in 2000. Lucas: And that's actually good for emissions in the short run — replacing coal with gas cuts carbon dioxide roughly in half per megawatt-hour. But it's a trap if it locks in gas infrastructure for decades, crowding out renewables that would have zero emissions. The IEA has warned that the world can't afford new long-lived fossil fuel assets if we want to hit net-zero by 2050. Luna: So the question is: does cheap gas accelerate the transition by killing coal, or does it delay it by undercutting renewables? Lucas: I think the honest answer is both, and the net effect depends on policy. If you look at the Inflation Reduction Act, it offers 10-year production tax credits for solar and wind, which insulate them somewhat from short-term gas price fluctuations. But those credits are static — they don't adjust when gas prices fall. So the levelized cost of solar has actually risen relative to gas this year. Luna: And that's showing up in project announcements. We've seen several large solar farms delayed or cancelled in Texas and the Southwest, with developers citing low wholesale power prices. It's not a crisis yet, but it's a headwind. Lucas: Right. And Texas is a key case — ERCOT, the state's grid operator, has been running on about 45 percent gas and 30 percent wind and solar on most days this summer. When gas is cheap, the economic dispatch algorithms favor gas plants, and renewables get curtailed. That's happening right now. Luna: So for listeners tracking their energy investments or just their electricity bills, what should they be watching for the rest of 2026? Lucas: Two things. First, the gas storage report every Thursday — if injections stay above the five-year average, prices will stay low. Second, any news from the Gulf Coast about LNG export terminal capacity. If a new facility comes online, that could tighten the domestic market. Luna: And the wild card is the AI data center moratorium. If other states like Virginia or Georgia follow New York, that could significantly dent the demand growth narrative. Lucas: Exactly. And on that note, I want to mention something briefly. A lot of you have asked how we keep this show ad-free and independent. The answer is simple: listeners like you who chip in a few dollars a month. If you've gotten value from these episodes — maybe a sharper understanding of energy markets or a better investment decision — consider buying us a coffee. It's buy me a coffee dot com slash fexingo. That support genuinely makes a difference in keeping the podcast going. Luna: Yeah, and it's not about big pledges. A couple of dollars a month from people who find the show useful — that's what funds the research and keeps us free of sponsors. So if that's you, thank you. Lucas: Back to the market. One more data point: the ten-year breakeven inflation rate ticked up to 2.26 percent today, from 2.24. That's still well within the Fed's comfort zone, but it suggests that oil's rally isn't feeding into broader inflation expectations — at least not yet. The core CPI actually fell slightly in June. So for now, the Fed can look through the oil spike. But if natural gas prices reverse and start rising, that would be a different story. Luna: Because gas hits consumers' wallets directly — heating bills, electricity rates. Oil is more of an input cost for businesses and a pinch at the pump. Gas is a political issue. Lucas: Exactly. And that's why I'm watching Henry Hub more closely than WTI right now. The oil story is about geopolitics and risk premiums. The gas story is about the real economy — manufacturing, electricity, data centers, heating homes. It's more tangled, and in some ways more consequential for the average person. Luna: So we'll keep tracking both. Next week, we'll look at whether the coal to gas switching has peaked, and what it means for emissions targets. Lucas: Sounds good. For now, I think the takeaway is clear: cheap gas is reshaping US power markets in real time, and investors who ignore it are missing a key piece of the energy transition puzzle.