Is This the Time for Government Intervention in Free Markets?

Last week the U.S. Senate Committee on Energy & Natural Resources held a hearing on natural gas and Liquid Natural Gas (LNG) exports.  On the whole, the discussion was a good one, covering issues of natural gas availability, safety of fracking fluids, domestic uses of natural gas, and jobs created in the natural gas industry and related chemical manufacturing industry.  But there were some elements of the discussion that should leave Senators and the public somewhat puzzled.

Perhaps most puzzling were statements associated with the desirability and viability of potential government control of natural gas prices and markets.  The idea is seemingly simple; keep domestic natural gas prices low.  Doing so will, of course, benefit domestic consumers of natural gas.  Those consumers include the public and large manufacturers like Dow Chemical, which is a heavy user of natural gas and whose CEO, Andrew N. Liveris, testified at the Senate hearing.

This blog has already pointed to the conundrum that the US faces with oil and gas prices.  We are not an island that is insulated from global energy prices.  Yet, a puzzling premise of the hearing appears to be that our domestic abundance of natural gas allows us to behave as if we were an island.  And that is the second puzzling aspect of the Senate Committee’s hearing.

Since the US has the potential to become a net exporter of natural gas because of its domestic abundance, the government can stand in the way of exports by limiting permits for exports of LNG.  Of course, damping the supply of domestic natural gas has several unintended, potential consequences.  Those include stifling job growth in the energy industry, stifling domestic production of natural gas, causing prices to rise for domestic consumers and increasing the balance of payments by restricting exports.

The third and final puzzling aspect of the Senate hearing is why the Senate or the federal government should try to pick winners and losers among potential job creators.  Keeping the domestic natural gas price low perhaps will positively impact the US chemical industry and the number of jobs it creates with increased production.  At the same time, keeping natural gas prices low and restricting exports of natural gas have the potential to stifle job growth in the domestic energy industry.  It will do so by restricting supply for US natural gas with prices held artificially below global levels.

More hearings from the Senate Committee on Energy & Natural Resources are likely.  We should watch closely for testimony and Senate recommendations that may tend to distort US markets and negatively impact economic growth with restrictions on job growth in any industry, including the natural gas industry.

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2013 and the Transformation in Power Production

National Public Radio recently reported on the transformation of the power industry from coal to natural gas; it focused on Georgia Power’s growth in electric generating plants from natural gas.  This transformation is part of a broader, global move from coal to natural gas in power generation.  The World Energy Outlook 2012 report forecasted that, even with new, restrictive policies, global demand for coal will grow at 1 percent compound average annual growth rate between now and 2035.  Growth in natural gas consumption on the other hand will surpass that with a compound annual growth rate of 1.6 percent and a whopping 47 percent increase in consumption between now and 2035.

Without any change in policy, the World Energy Outlook 2012 forecasts substantial growth in demand for electric power.  In OECD countries it will grow by 16 percent, but in non-OECD countries electric power consumption will grow by 54 percent under the same scenario of no change to policy.  Much of this growth in power production will continue to depend on traditional fossil fuels including coal.  However, the extent to which there is an increasing transition to other fuels is evident in the report.

Across the globe, the report forecasts that gas-fired power generation will grow by almost 80 percent under a scenario that includes introduction of some new policies associated with carbon restrictions.  The report also forecasts that two-thirds of new plants will be built in non-OECD countries.  There are many reasons for the growth in natural gas-fired power plants.  They require lower capital costs and they permit shorter construction times.  With the increased production of natural gas from fracking, especially in the United States, prices for natural gas remain low as another advantage for power production from natural gas-fired plants.  As this blog has also noted in the past natural gas also produces fewer carbon emissions.

Changes in power production will come from increased use of renewables as well.  The production capacity from renewables almost triples in one scenario, but its growth is disproportionately in Europe, India and China.  Nuclear power will grow at a modest pace as a result of the disaffection with nuclear power that resulted from the disastrous earthquake in Japan, and power production from oil will continue to decline.

Where there will be the greatest change in power production is in from natural gas.  The US stands to benefit from this change with its very large available natural gas supply, its sophisticated technology, and the potential for favorable regulation associated with fracking.  What is unlikely to change is the demand for energy from developed countries and especially developing countries, as I wrote in my last entry.

World Energy Outlook 2012 – Part III: Coal

What is likely to be missed from news about the World Energy Outlook 2012 report is the role of coal in the future global energy mix.  With recent attention on natural gas (See Penley on Energy and Education) and the focus of most news reports on the US surpassing Saudi Arabia in oil production by 2020, the anticipated role of coal was lost.  Yet, the report forecasts that, even with new, restrictive policies, global demand for coal will actually grow by 1 percent compound average annual rate.  Coal demand is expected to more than doubles by 2035 in India.

It is clear that coal will play a very large role in our future energy mix.  In the last decade, it was coal that met 45 percent of the energy demand, per the Outlook 2012.  Without policy changes associated with greenhouse gas emissions, the forecast is for coal to still grow at a 1.9 percent rate.  At that pace, coal would surpass oil as the leading fuel by 2025.  But even so, its proportion of the total energy mix would decline from the last decade’s 45 percent to 30 percent by 2035.  Renewables and natural gas will play a much larger role.

The role of coal in our energy future depends upon a variety of factors, but leading among those are government policy and technology development.  Of particular import to coal producers is the potential role that government can play in establishing policies that encourage replacement of coal by cleaner fuels, ranging from a variety of renewables to natural gas.  The power sector would be most affected by these policies, and they would change the role of coal where policies are implemented.

Of course, there are alternative scenarios that leave coal as a much bigger player in the future.  Among them is the development of new technology for coal gasification or carbon capture and sequestration.  Both are receiving the attention of researchers in academia and industry, and both have the potential to substantially reduce emissions from coal.  The challenge remains of sufficient investment in the research needed to produce viable, large scale, financially successful technology (see a review of the area in Underground coal gasification: From fundamentals to applications in the Progress in Energy and Combustion Science journal).

In the immediate future without substantial change to policies coal use will continue to grow at a rapid rate.  In 2011, coal demand grew by 5.6 percent, a growth rate that was similar to 2010 and far more rapid than 2009 when it was flat.  With increased demand for electrical power in developing countries, the very rapid 55% increase in coal demand over the last decade is understandable.  In 2010 65 percent of global coal demand was consumed in power generation.  Even with the advent of new policy restrictions, the 2012 report projects growth in coal demand in non-OECD countries at a compound average annual growth rate of 1.4 percent between 2010 and 2035.  That would mean that the global growth rate is still almost 1 percent despite a decline that is greater than 1 percent in OECD countries.

World Energy Outlook 2012 – Part II: Natural Gas

The big news a few weeks ago, as I wrote in this blog, came from the World Energy Outlook 2012 report, which wrote that the US is on a trajectory to surpass Saudi Arabia in oil production by 2020.  The US Department of Energy yesterday completed its study on natural gas exports by an outside consultant.  The report can be summarized was follows:

  • Because of the abundance of natural gas in the U.S., only modest price increases will be seen by domestic consumers;
  • Exports of natural gas are made possible primarily by the increased availability of it; and
  • The expected shift in power generation from coal to natural gas will be slowed by increased exports.

The modest price increases predicted from allowing greater exports of US natural gas are directly related to its increased availability from unconventional sources such as shale.  The World Energy Outlook had forecasted that most of the newly available natural gas would come from three countries: China, Australia, and the United States.  It forecasted that by 2035 natural gas would become the most important fuel in the US, surpassing even oil.

My previous blog entry, “Liquid Natural Gas and US Energy Exports,” pointed out the potential economic impact of allowing increased exports of natural gas in terms of job creation here in the US.  However, the extent of that growth hinges on federal regulatory approvals.  The long-awaited Department of Energy study paves the way for those approvals.  Already, the World Energy Outlook 2012 has forecast that, even with exports, 93% of natural gas produced in the US would be kept here at home for domestic consumption.

Why would 93% remain available for domestic consumption if federal regulations permitted increased exports of natural gas?  There are many reasons, but among them is the growing availability of natural gas outside the US.  The Outlook 2012 report forecasts that, even with potential new climate-related policy restrictions, the production of natural gas in non-OECD countries could grow at a 2.1% compound average annual rate between 2010 and 2035.  This compares with 0.85% over the same period in OECD countries like the US.

The primary reasons for increased domestic consumption are the extent to which the power industry is shifting its fuel source from coal to natural gas, and the expansion in availability of domestic natural gas. The Outlook 2012 report estimates that output in North America would continue to expand from approximately 650 billion cubic meters (bcm) in 2011 to 800 bcm in 2035, nearly a 25% increase in availability of domestic natural gas.

We are now beginning to see the potential that is coming from the growth in the worldwide natural gas supply.  It will result in shifts away from traditional fossil fuels to cleaner natural gas and substantial increases in jobs within the energy industry.  Of course, both will depend upon supportive regulation.  The Department of Energy report should move us toward that supportive regulation.

Good News on US Energy Availability

The US Energy Information Administration recently published its monthly report with good news about the increasing supply of domestic petroleum.  For the third consecutive year, total field production of petroleum rose.  From 7.5 million barrels per day in 2010, it has risen to 8.5 million in 2012, nearly a 12 percent increase.  Net imports of petroleum have fallen by 29 percent in the same period.

The downward slide in domestic energy production that began over fifteen years ago has finally turned around, and the US is more energy secure today because of it.  As this blog has detailed in the past, the US is headed toward a far more secure energy future.  Some might have thought that greater security was due entirely to the increase in the availability of natural gas from hydraulic fracturing, or “fracking.”  But in fact, domestic petroleum production has increased as well.  The US is now on target to go from 8.5 million barrels a day to 15.6 million barrels per day by 2020.

The development of domestic crude oil wells hit its lowest point in 1999 when fewer than 5,000 wells were drilled.  Despite some yearly fluctuation, the last four years have seen a 15.5 percent increase in number of wells drilled, and more than 15,000 wells were developed in 2010, the most recent year for which the US Energy Information Administration reported.

Why then have US gasoline prices not fallen in line with increased domestic oil production?  The answer is rising global demand for oil, which I discussed in an earlier blog.  World demand for energy and petroleum products such as gasoline determines price, not merely domestic supply and demand.  The October report from the US Energy Information Administration reports rising world crude oil production – and with it rising demand of course.  Since the early eighties, annual production has risen almost steadily.  With an average of more than 75 million barrels per day in the last seven months of 2012, worldwide crude oil production has risen almost 4 percent from 72.8 million barrels per day just five years ago.

Globally we are an energy consuming people.  As developing countries increase their desire for lifestyles like those familiar to Europeans and Americans, demand will increase.  It is not surprising that renewable energy supply, along with more traditional carbon fuels, is also increasing.  And the speed with which renewables are increasing is becoming steeper.  Between 2006 and 2011, renewable energy production increased 27 percent.

The good news on US energy availability is that both renewables and more traditional forms of energy generation are increasingly available domestically.  While the US cannot contain rising gasoline prices, it can benefit in energy security from the apparent domestic increase in both traditional and renewable sources of energy.

Liquid Natural Gas and US Energy Exports

The potential for growth in US energy exports was evident in two recent but unrelated reports – one from Honeywell UOP and the other from the US Energy Administration.  Together the two link growing global demand for natural gas to technological advances that will increase US energy exports.

Honeywell UOP just announced a deal with Malaysia’s Petronas to collaborate on natural gas processing.  Natural gas is the fastest growing source of energy, and the US has abundant resources.  This blog has previously pointed out how natural gas resources in the US have the potential to make the US energy independent.  The partnership between Honeywell UOP and Petronas is focused on new technology that will make natural gas more easily shipped in its liquid form, commonly referred to as LNG – liquid natural gas.

The technology that Honeywell UOP and Petronas are working on will remove contaminants such as CO2 and mercury prior to the liquefaction of the natural gas.  The resulting product can be even more compressed in its liquid form, thereby increasing the capacity of a ship to move it to areas of global demand.  And that is where another recent report – this one from the US Energy Administration – makes clear why the Honeywell UOP-Petronas partnership really matters.

Earlier in the month, the US Energy Administration published its current analysis of Chinese energy demand.  China has sought to raise its imports of natural gas via pipeline and LNG.  Although natural gas still accounts for only 4% of China’s energy consumption, the China Offshore Oil Company has substantially increased its investment in natural gas.  The China Report states that the China Offshore Oil Company invested $12 billion of its total 2011 $18 billion investment in natural gas.

While natural gas imports in China represented 12% of the total in 2010, they rose to 22% in 2011.  The Chinese government has established a 2020 goal for natural gas consumption to rise from 4% to 10% of total energy use.  The potential for the US with its huge supplies of natural gas is evident.  And that is the reason the technological advances intended from the Honeywell UOP and Petronas collaboration really matter.  Lowering costs of transport will further the capacity of the US to meet global energy demands such as those in China, thereby increasing US GDP and helping to reverse the long trend of US imports exceeding our exports.

Advances in Energy Research

The complex nature of our energy future was evident in a recent announcement by the National Energy Technology Laboratory (NETL).  NETL announced $4.4 million in new research funding for Solid Oxide Fuel Cell Research.  The two primary areas of research are electrochemical performance enhancement and improvements to the durability of cathode materials.  Said the NETL in its announcement of this research:

The SOFCs (solid oxide fuel cells) under development within SECA (Solid State Energy Conversion Alliance) are ideal for use in central generation applications, enabling efficient and economical systems for up to 99 percent carbon capture. They also emit practically no pollutants (nitrogen oxides and sulfur oxides) while consuming approximately one-third less water than other advanced power generation technologies. Power plants based on SECA fuel cells and coal gasifiers—units that turn solid coal into gaseous fuel—will generate power with overall efficiencies greater than 50 percent, compared to approximately 25 percent for traditional coal-fired power plants, including CO2 capture processes.

Renewables like wind and solar offer the advantage of a low carbon footprint when compared with traditional fossil fuels.  Among their disadvantages are relatively high costs when compared with traditional fossil sources of energy like oil and their intermittent availability.  That is why I have previously written about the importance of improved energy storage research (see Energy Storage: Advances in Research) if renewables are to gain much ground in our complex mix of energy sources.

Moreover, oil and coal remain readily available for the foreseeable future.  Our reliance on another fossil fuel, natural gas, is increasing rapidly with its widespread availability.  Its increased use is made possible through American technology that is making fracking safe and reliable.  With a lower carbon footprint and declining prices, natural gas is also increasingly becoming the fuel of choice for the generation of electricity used by those new electric vehicles.  But research like that supported by NETL could make coal a more acceptable source of energy as well.

The role of research is significant in not only how it advances our technology but in what it conveys about the complex energy map that we confront on the 21st century.  Having relied primarily in the 20th century on oil, coal and more traditional and ancient sources of energy, the 21st century is likely to appear very different at its close.  It will not, however, be a century of dramatic change.  Fossil fuels are just too inexpensive still and too widely available for that to change.  Moreover, developing countries are aggressively increasing their use of these valuable sources of energy.

While this century is already shaping up to be different from the last in our increased use of renewable energy sources, the mix of their use along with fossil fuels in the latter years of this century will fundamentally depend on the extent to which technology makes renewables cheaper, energy storage more reliable, and fossil fuels cleaner.  Research has already made natural gas the choice for a cleaner fuel from which to generate electricity.  It is likely as well to alter whether coal can be used without some of the atmospheric carbon and health-related aerosol issues that have been raised about it.  Much of our complex energy usage depends on our commitment to continued funding of sound research – by government and business.