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Are We Awash in Energy?

Dan Lashof

Posted April 12, 2012

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The New York Times ran two stories this week based on the premise that the era of fossil fuel scarcity is over, and exploring the implications of this new-found abundance. “Fuel to Burn: Now What?” addressed this question from a U.S. perspective, while “Out of Africa (and Elsewhere): More Fossil Fuels” looked at it through an international lens.

But is the premise true? Certainly U.S. natural gas prices are at historic lows and headed even lower in the short term as storage facilities fill up. This is a consequence of the boom in shale gas production and the fact that the U.S. natural gas market is currently isolated from global energy markets due to very limited liquefied natural gas (LNG) export capacity. But following a brief dip during the heart of the recession, oil prices remain stubbornly high despite significant increases in U.S. production and the destructive tar sands boom in Canada. Coal has never been scarce per se—the issue has always been and remains the cost of producing, transporting, and using it, and the environmental consequences of doing so. And we are, of course, awash in solar and wind energy. The challenge with these renewable resources remains the cost of capturing, transmitting, and storing them, although these costs have declined significantly in recent years.

Some historical perspective on energy prices is worth keeping in mind. This figure from the Energy Information Administration shows the average cost of fossil fuels to U.S. power plants from 1973 through 2011 in nominal dollars. (This price series provides a convenient way to get a consistent picture of the cost of fossil fuels, accounting for transportation costs. It also averages over some short-term price volatility as power plants purchase fuel trough a combination of short-term and long-term contracts). The most striking thing about this graph is the historically unprecedented divergence between natural gas and oil prices in the last three years. For 35 years the prices of natural gas and oil were very strongly correlated, and as recently as January 2009 the cost of oil and natural gas to power generators were almost identical on an energy-content basis. Since then the cost of natural gas has fallen while the cost of oil has increased to the point that there was a 5:1 ratio for power generators in December 2011. Natural gas prices have continued to fall this year, dropping below $2 per Million Btu on the spot market, while oil prices continue to hover around $100 per barrel, increasing the oil:gas price ratio to almost 10:1 on an energy content basis.

Fossil fuel prices.jpg

Don’t bet on natural gas prices staying this low for the long term. At current prices drilling activity is starting to slow down and demand is increasing as the variable costs of generating electricity from gas fall below those of coal in many regions. And the spread between natural gas and oil prices makes investments in natural gas vehicles and LNG export terminals look very attractive. All of these factors will tend to reduce the spread between gas and oil prices, but with a considerable lag as natural gas vehicle infrastructure and LNG tankers and terminals take a while to build. EIA’s short term forecast calls for spot prices at Henry Hub to average $2.50 per Million Btu this year and $3.40 next year, while the Annual Energy Outlook projects prices at $4.30 by 2015 and $4.80 in 2020. Four years ago, in its 2008 Annual Energy Outlook, EIA was projecting that natural gas would cost $5.90 in 2015 and 2020. This is a significant difference, driven by upward revisions in estimates of the potential for shale gas production as fracking activity expanded faster than expected, but it’s hardly the fundamental shift from an era of energy scarcity to an era of energy abundance painted by the New York Times’ stories.

More importantly, we were always going to run out of the earth’s capacity to absorb carbon dioxide without suffering catastrophic climate disruption long before we ran out of fossil fuels. As I told the Times, “finding new deposits doesn’t change the climate constraints facing the world.” A shift from more carbon-intensive coal to less carbon-intensive gas could allow us to use more fossil fuel Btus for the same climate impact, but only if we prevent that methane-rich gas from leaking into the atmosphere. Sooner, or just a little later, we have to stop venting fossil fuel carbon into the atmosphere once and for all.

So yes, we are awash in energy and always have been. But the real question is can we affordably deliver energy to where we need it, when we need, without destroying the planet in the process. Short term swings in energy prices don’t alter that fundamental challenge.

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