Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

08 October 2012

How Near-Term Energy Policy Could Make or Break Us

To sell, or not to sell, that is the question.

The new horizontal drilling technology known as “fracking” has brought us a “glut” of natural gas. In so doing, it has reduced natural-gas prices by a factor of five or six from their levels just a few years ago.

This “glut” and its consequent price reduction give us extraordinary opportunities as a nation. As I’ve analyzed in detail in an earlier post, they give us the chance to dump the most catastrophically damaging fuel known—coal—once and for all. We can do that by switching our non-renewable power sources to natural gas.

Doing so would make us a leader, not a lagger, in fighting climate change. At the same time, it would reduce our incidence of acid rain, mercury pollution of waterways and seas, and particulate-induced asthma and other respiratory diseases that burning coal causes.

But that’s just the beginning. Not only can we switch power generation from coal to natural gas. We can also switch our small vehicles and even our long-distance trucking. In that way we can make ourselves 100% energy independent in just the ten to fifteen years it would take us to convert, if we make up our minds to do so quickly.

Energy independence and lower energy prices would revive our sluggish economy in three ways. First, the conversion process would create millions of non-outsourceable jobs, not only in energy extraction, but in building and maintaining gas pipelines, converting vehicles, and making and selling gas compressors for use by homes and small businesses to “gas up” in one’s own garage.

Second, the price of energy still affects the price of almost everything, notwithstanding our strenuous efforts to conserve and increase efficiency. By lowering the price of the energy we use (as compared to oil and coal, for example), natural gas would allow our business and industry to become more competitive abroad.

Finally, as I have described in detail in the earlier post, natural gas can provide a gateway and smooth transition to a truly sustainable energy infrastructure. Natural gas works well in tandem with wind and solar power, making a transition to renewables quicker and cheaper and, at the same time, extending the deadline for doing so by extending our natural-gas reserves.

There is just one problem. Rising prices of natural gas threaten to put all of these promises beyond our reach.

Just seven months ago, last March, I published my post analyzing the many benefits of natural gas as a transition fuel. At that time, the wholesale price of natural gas was about $2.60 per million BTU. That was near a several-year low that occurred in middle of this year. [See Spot Prices Graph] Now natural-gas prices are soaring. For the week of October 3, 2012, they were $3.21 per million BTU. [See right sidebar: “Overview”] That’s an increase of 23%—nearly a quarter—in just seven months.

If this trend continues, all the benefits of the fracking craze that I outlined above and described in my earlier post will be lost, because they all depend on natural-gas’ price advantage. We will be left with the many (but manageable) environmental consequences of “fracking” but none of its benefits, except for a bigger supply of natural-gas for space heating at higher prices.

The two principal causes of the price spike are plain. First, a massive shift from coal to natural gas for generating electricity is already under way. In just a handful of years, the percentage of our electric power coming from coal has dropped from nearly 50% to 32%, the same as natural gas. [See third-to-last paragraph]

Greater gas usage raises prices according to the law of supply and demand. Speculation in futures markets may increase the price more rapidly and even overshoot. Perhaps that possibility is worth a look. But there’s nothing that anyone can (or should) do about the law of supply and demand. It’s a fact of life.

The second cause of soaring prices is something under our control. Fossil-fuel drillers don’t like low prices. They especially don’t like low natural-gas prices when prices abroad are (almost universally) back where they were here before our fracking “glut” started. In Europe and most of Asia they’re near or above double digits in dollars per million BTU.

So what do the drillers want to do? They want to sell our natural-gas abroad. Their doing so would equalize prices at home and abroad and kill our energy renaissance.

There is just one problem. For physical reasons, natural gas is a “local” commodity. It’s hard and expensive to transport. Pipelines can do the job relatively cheaply on contiguous land. But no one has ever proposed overseas pipelines, and the most promising markets for our cheap natural gas are in Europe, Asia and Latin America. So the fossil-fuel sellers want to liquify our natural gas and ship it abroad in supertankers in a search for higher prices.

Doing that will cost a lot of money and take years—maybe even a decade or more. It will require vast changes in our (and Canada’s) energy infrastructure: new pipelines to the terminals for liquified natural gas (LNG), vast new plants for liquefaction (which themselves require lots of energy), and new terminals and supertankers to take the liquified product abroad for sale.

What do we as a people get for all that investment? Not much. It will kill our energy renaissance, retard our transition to renewables, make everything more expensive here, and decrease our competitiveness abroad.

But most of all, it will cut drastically the short time that natural-gas gives us to find sustainable energy solutions.

If we use our currently estimated reserves of conventional and “fracked” natural gas for current uses, plus retiring coal and achieving energy independence in transportation, they will last us 39 years. If we also sell half of our reserves abroad, they will last us less than two decades. At that level, their short lifetime would reduce the incentive to invest in the necessary infrastructure, making the whole fracked-gas energy renaissance unviable.

As faithful readers of this blog know, I’m a true believer in free trade, far more than most progressives. I also believe in the benefits of globalization, although lately they have occurred mostly outside our borders and are long term.

But this is ridiculous! To allow a short-term profit mentality of private companies to destroy utterly a winning national energy strategy would be economic suicide. Can we say “national security trumps private profit”?

You probably won’t hear much about this issue in the presidential debates. The issue is too new and complex for the candidates’ political consultants to have had it analyzed and focus-grouped.

But you can predict with near certainty how the two candidates would handle it. Mitt believes in private enterprise and private profit above all. He thinks that private greed is the source of all human progress. He even adopted his running mate’s long-term strategy to kill Medicare once and for all and direct the money to private insurers’ profit. [search for “downhill”]

The President believes in markets and private enterprise, too, but with a difference. He knows there are times when private greed for private profit must yield to the public good.

If there ever was such a time, this is one of them, and this is such an issue.

Selling our gas abroad would be great for fossil-fuel drillers. With a not-so-big investment in infrastructure, they could increase the price of their commodity five or six times, without any new investment in finding or extracting energy sources.

But selling our natural gas abroad would not be so good for the rest of us, or for our species. It would throw away a national treasure that nature and our own ingenuity gave us, so that fossil-fuel drillers could make a few more bucks. The many—we Yanks and our entire species—would make a gigantic sacrifice for the profit of a few.

Actually, the issue is not just greed, but short-term greed. Natural gas companies will make plenty of profit as domestic usage increases. Increasing domestic usage will cause prices to rise gradually and naturally. Then prices will rise dramatically as natural gas begins to run out, just as oil prices are doing now (except when the global economy stumbles). But the fossil-fuel barons apparently aren’t willing to wait. Like most Baby Boomers, they want their profits now.

Selling abroad the treasure that geology and nature gave us Yanks in abundance is the wrong way to share the benefits of fracking globally. The right way is to sell fracking technology, equipment, and expertise, so that others can exploit their own unexploited natural resources, dump coal, lower the price of energy, improve their own economies by their own effort, and make a smoother transition to renewable energy, so that we don’t cook our planet too much further.

Though you probably won’t hear about it in the debates or campaign ads, this election offers a clear choice between the wrong and right ways to exploit fracking. Besides investing or nor investing in safe nuclear energy, no near-term choice in energy policy will be more consequential than selling or not selling our natural gas abroad.



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