The Effects of Shale Gas Production on Natural Gas Prices

The Producer Price Index (PPI) for natural gas, measured on an annual average basis, fell 56.8 percent between 2007 and 2012, in response to strong growth in domestic energy production. The application of horizontal hydraulic fracturing (fracking) to shale rock formations contributed significantly to this increase in supply, as the technique boosted natural gas production yield by more than 25 percent over this period. Since shale gas has been a key player in domestic natural gas production for only a few years, and because it has been tracked over a relatively short period (since 2007) by the Energy Information Administration (EIA), analysts find that it is difficult to quantify precisely the effects that shale gas has had on natural gas prices. However, data indicate that increasingly higher natural gas prices during the first half of 2008 lured additional shale gas to the market. As natural gas prices peaked in July 2008, drilling activity (as measured by rig counts) hit an all-time high.2 Eventually, effects of oversupply took hold