Our other energy crisis.

Making government work better.
May 11 2004 2:47 PM

Got Gas?

Oil isn't the only fossil fuel that's in crisis.

Now that you've finally adjusted to spiking oil prices, here comes another energy crisis—in natural gas. In recent hearings before Congress, Federal Reserve Chairman Alan Greenspan confirmed what energy traders have known for months: that prices for natural gas could top $6 per thousand cubic feet this summer—double the 2003 price and nearly three times the average price since 1980—and may soar even higher over the next four years. The gas markup will not only slow the U.S. economy and slam your wallet, it will also, perversely, delay the development of cleaner, renewable energy sources to replace oil and gas.

Natural gas doesn't attract the attention that oil does: U.S. consumers who reliably go ballistic over a 5 cent hike in gasoline are largely oblivious when natural gas prices jump. But natural gas should not be ignored. Today, natural gas—or just "gas," if you want to sound like an insider—accounts for nearly one-third of America's total energy use, and demand is going nowhere but up. Because gas is relatively clean-burning, it is popular as a heating fuel and is overtaking dirtier coal as the preferred fuel for generating electricity. (Read why it became so popular here.)

What's more, gas can be refined into other fuels, including a synthetic gasoline, and can be turned relatively easily into hydrogen, aka the Fuel of the Future. This is why gas is widely touted as a "bridge" fuel—that is, a cheap, existing energy source that could help the world gracefully shift from its current oil-based energy economy, with its massive environmental and political liabilities, to a cleaner, more stable system in the future. But that rosy scenario becomes harder to imagine with gas at $6.

Although gas has been around as long as oil, the gas market really didn't take off until the 1990s, when demand for electricity began to soar.  A new class of companies, "energy merchants" like Enron and Dynegy, saw a dazzling new future for natural gas: They would buy it cheaply, turn it into electricity, and sell those megawatts for a nice mark-up—known as the "spark spread"—in the hungry U.S. power market. The California energy crisis of 1999 and 2000 only added to gas fever: Although we now know that the "crisis" was mainly manufactured by utilities and traders, the apparent shortage of electricity in the West spurred construction of gas-fired power plants. Since 1999, more than 220,000 megawatts of new, gas-fired power capacity (roughly 30 percent of the nation's total electric supply) have come online, worth more than $143 billion, as investors and utilities scrambled to take advantage of increasing power prices.

All at once, the United States seemed to be on a verge of becoming a gas economy—a transformation whose benefits would go well beyond power plants. With gas "microturbines," for example, individual companies and even communities could become independent power generators, buying gas instead of electricity from utilities and creating their own self-contained "micro" power grids that would be far less prone to blackouts than the current national grid is. Such "distributed power systems," which many experts believe will eventually replace our traditional, centralized power systems, would also let consumers create their own mix of power sources. Owners of a microgrid in a city or state with strict air-quality laws, for example, could choose to emphasize wind or solar power as their main power source, filling in any supply gaps with the quick-starting gas-powered microturbines. Small gas turbines can even be used in place of a gasoline or diesel engine in gas-electric hybrid cars—yet another "bridge" technology that would let us dramatically reduce auto emissions and improve fuel economy.

Better still is the way gas could ease our transition to a more climate-friendly energy economy. Gas produces less carbon dioxide—about 50 percent less than coal and 33 percent less than oil—for the same energy production. Granted, gas isn't the ideal climate-friendly fuel: The main component of natural gas is methane, a "greenhouse gas" with a climate-changing impact roughly 20 times that of mere carbon dioxide. Further, even if we managed to replace all current coal-fired power with gas-fired power, we would only cut carbon emissions by 30 percent: In other words, moving to a gas-fired economy won't solve our climate problems. But it would buy some time—perhaps another five or 10 years in the race to figure out some non-hydrocarbon energy system. This helps explain why everyone, from utilities to energy experts, is so enthusiastic at the possibility of a "gas economy."

But now the energy industry is discovering the flaw in that rosy scenario: We don't have enough gas. Even as demand is rising, America's gas production is actually falling. America's biggest gas fields have long since been tapped, and the new fields being discovered are declining in size. The United States is still the No. 2 gas producer behind Russia, but our production is still falling by about 2 percent a year.

Greenspan and others say the solution is to start importing gas like crazy. We could, for example, get gas from the vast fields in nearby Alaska and Canada's Mackenzie Delta. But to do so would require building a $20 billion pipeline, which energy companies have so far refused to pay for without guarantees from the U.S government.

In theory, we could also tanker in liquefied natural gas from places like Qatar or Trinidad, which have lots of gas to spare. But to import LNG, you would need to build huge re-gassification, or "re-gas," plants in U.S. ports, which let you turn the liquid back into a gas, for use in homes, power plants, and factories. Unfortunately, only a few of the 40 re-gas facilities planned for U.S. ports have been built—in large part because of citizen fears that an LNG tanker is like a floating bomb. (In fact, LNG, though flammable, is far less explosive than gasoline, which is routinely tankered into U.S. ports with little public notice.) In short, gas imports will grow only slowly, which means that supply can expand only incrementally—and barely keep up with demand.

So for the third year in a row, America faces a gas shortage, which will hit us on several fronts. Because gas is now the preferred fuel for power generation as well as for home heating, gas demand is now high both in winter and in the summer, when air conditioners drive up electricity use. Last summer's relatively mild temperatures spared us from a disastrous price spike; but forecasters fear that if this summer turns out as hot as early trends suggest, we could see short-term gas prices hit $10 per thousand cubic feet.

Longer term, the gas picture is more complex. On the positive side, the higher prices may act as a kind of corrective to the supply imbalance, both by depressing American demand (many big industrial gas users are simply shutting down and moving to Europe, where gas is cheaper) and by encouraging companies to import LNG as fast as is politically possible. Higher gas prices—and the corresponding higher electricity prices—will also tend to make alternative energy sources look attractive: The high gas prices of 2000 helped touch off a boom in wind farms in the United States.

The downsides, however, are significant. U.S. electricity demand shows no signs of slowing, and that is likely to suck up any new gas supplies as quickly as they appear, keeping the gas market relatively tight. Tight markets are prone to volatility: There is no slack, no spare gas in the system to cover, say, an unexpected cold snap. Prices can whipsaw violently, which not only hurts consumers and businesses, but makes energy companies leery of investing in gas and LNG infrastructure, because they never know where the price will wind up—and thus, how quickly their investment will pay off. This reluctance, in turn, only further retards the expansion of gas supplies, which adds even more upward pressure to prices.

But the biggest loser may be the emerging vision of a gas economy. If markets remain tight, we'll be so busy trying to supply our power plants that we won't have much gas left over for any new applications—for, say, making synthetic gasoline, or hydrogen for fuel cell cars, or microgrids, or any of the other elements that might make up a new energy economy. To be sure, markets have a way of correcting themselves. High prices will eventually bring on new supply, especially in the form of imports, and this new supply will eventually help fuel the transition to a cleaner energy system. But it won't happen as quickly as it might have, and this delay could prove costly. For every year we remain with the existing energy economy—generating our power with coal, or running our cars on oil—will not only increase the damage to the environment, but also make it harder and more expensive to change to something better.

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