While producers are understandably downbeat about oil and gas prices, the prices are a signal that the free market continues to work, said Peter Tertzakian, chief economist at ARC Financial Corp., during his lunch keynote at the DUG Canada 2012 conference in Calgary.

“Sometimes people get a sense of denial about the free market and say that rules have changed. I used to follow the high-tech industry, and by the end of the ‘90s there were all of these statements that the old rules of economics were dead and we were in a new economy. Then the boom went bust and proved that the laws of economics must be respected,” he said.

Tertzakian compared this late-90s ethos with similar talk from unconventional oil and gas producers during the past few years, which boasted of a new gas economy. While not disputing that many aspects of the oil and gas industry have changed due to new technologies that have unlocked oil and reserves in North America, he stated that the aforementioned economic rules still applied and must be observed.

“The laws of the free market are very much still in place, and you cannot be in denial of the economic indicators that are in place today,” he continued, while noting that the real prices of natural gas after accounting for inflation have declined over the past century because of the greater access to this commodity.

“We have to get rid of this notion that the real price of commodities always goes up. Technology has brought gas prices down, not up,” he said. The good news is that gas prices are flexible, and that as prices go down, demand from end users increases, as is being evidenced by both the manufacturing and electric-generation markets increasing their consumption of natural gas.

Tertzakian said that this flexibility is needed because the world is filled with breaking points, or very disruptive and dislocating changes, such as what occurred last year in Japan with the Fukushima nuclear power plant meltdown that caused the country’s demand for LNG to skyrocket.

“These breaking points change how society gets its energy. Natural gas was already the fastest-growing energy source in the world, but the incident in Japan and the fact that nuclear power is being phased out in the Western world in favor of natural gas really enhances natural gas,” he said.

Yet, while the rest of the world views natural gas as the fuel of the future, in North America it is thought of as a waste product due to the focus on oil production, he says. Much of the natural gas that is currently being produced is a byproduct of oil and liquids production and not a result of dry-gas drilling.

However, this is again a symbol that the free market is working because as gas prices have decreased, producers have decreased the number of rigs focused on dry-gas production and instead turned to liquids-rich gas and oil plays, he said. Although demand for oil in developing nations such as China and India is increasing, it is falling in much of the Western world, which doesn’t bode well for oil prices.

Tertzakian noted that since 2006, vehicle miles traveled has decreased as consumer behaviors have altered in response to high oil prices in 2008. Because of this behavior change, it is unlikely that consumption of oil will increase even if oil prices drop.

As stated earlier, this is not the case with natural gas consumption, which does increase as prices decrease. “All of the forces of the market are pushing gas prices up and oil prices down,” he said.

When reviewing the laws of economics, Tertzakian said that it is likely that next year will be big year for natural gas as low prices will increase consumption by both consumers and industrial manufacturers. This doesn’t mean that prices will increase substantially, but the market will begin a recovery that will continue as more uses are found—as long as the free market is respected.

“Ten years from now you’re not going to recognize this industry in terms of the markets it’s going to have access to, but the issue is not where the industry will be 10 years from now, but five years from now—and what we do and how we behave. The free market will work for the benefit of those that work proactively and are on board with changes that technology creates,” he said.