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January 18, 2011

Natural Gas Disrupts the Energy Industry

Got an energy problem? Natural gas is the answer- unless you're in the coal, nuclear, alternative energy, or railroad industries. If you're in one of those industries, natural gas is very much the problem.

First the facts:

  • Widespread use of horizontal drilling and hydraulic fracturing technology has resulted in a lower wellhead price for natural gas in 2009 than any year since 2002 even though annual usage was near an all-time high in 2009. It looks like 2010 usage, for which final figures are not yet available, will set a record with prices essentially flat.
  • Because of these technologies, the Department of Energy has more than doubled its estimate of shale gas technically recoverable in the US. The new estimate of 827 trillion cubic feet is, according to a Reuters story, "the energy equivalent to around 142 billion barrels of oil – slightly more than the proven reserves of Iran."
  • Generating electricity with natural gas instead of coal reduces carbon dioxide emissions by 50% and reduces traditional pollutants even more significantly.
  • The capital cost per eventual kilowatt hour produced for a natural gas generating plant is substantially lower than for coal, nuclear, wind, or solar and this is true at almost any scale.
  • Natural gas generating plants can be throttled up or down almost instantly to meet varying demands in a way that coal or nuclear can't be. That's why natural gas is used almost exclusively for power plants meant to meet peak demand. Natural gas plants produce much more predictable power than solar or wind.
  • Powering a light vehicle with natural gas reduces carbon dioxide emissions by 25% and virtually eliminates traditional pollutants. That's why forklifts inside buildings run on natural gas and why we can use our gas stoves inside with venting.
  • Natural gas versions of many existing cars and light trucks already exist. No new technology is required to make natural gas models of the cars we already drive – although, of course, fueling infrastructure would have to be built (not trivial).
  • Natural gas travels efficiently by pipeline. Great for reducing the energy and dollar cost of transportation once the pipelines are built (again not trivial).

The Department of Energy is now predicting that electricity prices in constant dollars will DECLINE though 2016 because the marginal price is dependent on the price of natural gas used for peaking and increased natural gas use at low capital and fuel costs is likely. No subsidies for natural gas are required. A switchover to natural gas for a significant portion of electricity generation and transportation and home heating will reduce our carbon footprint – and no mandates are needed since the technology exists, the supply is secure, and the economics are already favorable. The balance of payments deficit goes way down; dependence on oil from unstable places could be significantly reduced by some combination of natural gas vehicles and electric vehicles running on incremental electricity generated from natural gas. We don't have to worry that natural gas extraction in the US or the building of pipelines will be outsourced to China. We can eliminate the subsidies to competing energy sources including coal, nuclear, oil, and alternatives; where their economics are or become favorable, they can go back in the mix.

BTW, natural gas works very well in tandem with wind or solar in places where deployment of those technologies is justified. Since the capital cost of a gas plant is low and it can spool up or down quickly, you save gas when the wind blows or the sun shines and burn it when they don't.

So what's not to like?

Some will object that natural gas is a fossil fuel and will someday run out. Experience tells us, however, that someday will be further away than we think and time to develop other technologies is our friend.

Some will object that natural gas is a hydrocarbon and burning it produces carbon dioxide. However, if your goal is rapid reduction in current emissions, there is no better way to achieve it than by the relatively easy switch from oil and coal to natural gas. Insisting on the slow and expensive deployment of solar (or nuclear, for that matter) rather than the fast increased use of natural gas is making the perfect the enemy of the good.

People in the nuclear, coal, and alternative energy construction industries will not be happy to have a subsidy-free competitor for new generating capacity – especially if their own subsidies are removed as logic and budget dictates. Current subsidies to build new US nuclear plants are proving not to be sufficient given the falling projections for electricity prices. The railroad industry likes to haul coal and doesn't like pipelines. The oil industry will find their prices pressured if natural gas can be used increasingly to power transportation.

Look for increased lobbying to protect all these interests. There will be "environmental" objections both to building pipelines and to the technologies which are making shale gas accessible. The federal government does have a role in setting reasonable standards for these technologies and should do so quickly and invite states to subscribe to them uniformly. Enforcement needs to be effective and better than panicked reaction. The challenge will be in keeping the regulation of natural gas extraction and pipeline building from becoming a weapon for those who wish that the gas would just stay in the ground and stop interfering with their own business plans.

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