Not since the late 1990s have natural gas prices been this low in the dead of winter. That includes the aftermath of the 2008 crash, when oil bottomed briefly under USD30 a barrel. US inventories of the clean fuel hit a record of 3.852 trillion cubic feet in November and remain at a record for December, 11.4 percent above year-earlier levels.

Heating demand that’s nearly 20 percent below normal so far this season is at least partly to blame. Roughly half of Americans heat their homes with natural gas. This shortfall has been offset somewhat by a jump in gas’ share of electricity generation to nearly 30 percent from an average of only about 20 percent in recent years.

Gas is increasingly popular with utilities and other power generators because it’s a quick way to get into compliance with tightening US Environmental Protection Agency (EPA) regulations on emissions of mercury, particulate matter and acid rain-causing gases. Gas-fired plants also emit less than half the carbon dioxide per kilowatt of power produced, they’re easy and economic to scale up quickly and they’re the best way to ensure adequate backup capacity in case notoriously erratic wind and solar plants don’t produce as expected.

In addition, gas is for the first time a much cheaper fuel than its arch rival coal. The latter’s price has benefitted from robust demand in countries such as China and India, which are still constructing huge new coal-fired power plants at a rapid clip.

All that’s likely to keep power companies in North America “dashing” for gas and demand for the fuel rising. Meanwhile, efforts to boost natural gas’ use for transportation are moving forward, providing another potentially major source of demand.

Finally, several new projects are underway to export natural gas to the rest of the world. One of these is a venture between Progress Energy Resources Corp (TSX: PRQ, OTC: PRQNF) and Malaysian national oil company Petronas. The latter is not only bankrolling Progress Energy’s efforts to expand gas production from a third-quarter 2011 rate of 42,900 barrels of oil equivalent per day (boe/d) to 100,000-plus by 2015. It’s funding the planned construction of a liquefied natural gas (LNG) export terminal, one of five such projects in various stages of development on British Columbia’s West Coast.

Encana Corp (TSX: ECA, NYSE: ECA), Shell Canada and Apache Canada are also funding projects in BC. Meanwhile, Dominion Resources (NYSE: D) is moving to equip its Cove Point, Maryland, LNG import terminal for exports, which would unlock Marcellus shale output for global shipping. So is Cheniere Energy Inc (NYSE: LNG), though its ability to bring a deal to fruition is in doubt due to extreme financial weakness and a recent 39 percent boost in projected project costs.

In short, demand for North American natural gas is on the rise and looks set to stay that way for years to come. Unfortunately for producers, rising usage–however impressive–is dwarfed by mushrooming supplies and production, made possible by the shale energy revolution.

According to the Energy Information Administration, US production of dry natural gas rose from 18.504 trillion cubic feet in 2006 to more than 23 trillion cubic feet in 2011.

That was partly offset by a drop in Canadian natural gas production from 6.6 trillion cubic feet in 2006 to 5.4 trillion in 2010. But here, too, volumes have started to pick up, as producers have discovered the joys of producing from shale, with BC leading the way and Alberta surging as heretofore untapped sources are exploited.

The key area so far has been the Montney Shale, which has spurred large output at several companies, including ARC Resources Ltd (TSX: ARX, OTC: AETUF). ARC and others have also set their sites on liquids-rich gas opportunities in Ante Creek and Pembina in Alberta, Parkland in BC and Goodlands in Manitoba. And many believe the Horn River Shale play will wind up dwarfing even these prolific finds.

All this gas is much less valuable to produce at sub-USD3 prices than it would be at USD5. One reason gas producers haven’t yet pulled in their horns is most have substantial hedge positions that lock in prices for much of their output at least through 2012. That alone is expected to keep North American output of gas growing next year, further boosting supplies.