- Cheap crude has yet to penetrate U.S. electricity markets
- Recent price spreads are nowhere near historical lows
U.S. power plants rarely burn oil. Coal and natural gas dominate the electric grid, with oil-fired units reserved purely for backup purposes. Until recently, conventional wisdom suggested the U.S. power sector would never consume meaningful quantities of oil. Coal and natural gas were simply cheaper.
The recent drop in crude prices raises the possibility of widespread gas-to-oil fuel switching. At least in theory, if oil prices undercut gas prices, oil plants can turn on to replace gas plants.
We have observed zero evidence of this happening. There has been no uptick in oil-fired generation, despite narrowing price spreads between fuel oil and natural gas.
Recent changes in oil-gas spreads are minuscule compared to what prompted the last big oil-burn bonanza: In January 2018, very cold weather (dubbed the ‘bomb cyclone’) created a surge in natural gas prices. Oil burn spiked. This historical event demonstrated how steeply oil-gas price spreads needed to flip, in order to trigger meaningful quantities of oil burn.
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