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Competing for Energy Resources - Part 1

Both electricity and liquid fuel supplies appear to be increasing in costs in the United States. The U.S. appetite for liquid fuels in the forms of gasoline and diesel fuels has very nearly reached the capacity maximum of the existing U.S. refineries. This demand for fuel continues to increase as more and more people convert to SUVs and larger automobiles. The trucking industry demand for fuel increases with improvements in the economy.

OPEC has indicated that it believes an oil price between $25/bbl and$28/bbl is an appropriate guideline. Currently the market price is closer to $40/bbl and doesn’t appear to be softening. As the economies in Europe grow with the addition of 14 nations to the EU, and with the continued expansion of the economy in China, it would appear that the increased competition for oil and natural gas will not move their prices in a downward direction.

The U.S. independent power companies and Investor Owned Utilities have installed more than 200,000 MW of natural gas fired electricity generating facilities. While some of these facilities were designed for providing “peaking” power supplies, many of them were designed for continuous operation. Using premium fuels for short duration operations is generally considered necessary, but using premium fuels for continuous operation is simply adding to the nation’s energy problems.

A recent piece in television indicated that the current demand for oil was around 77 million barrels/day or about 28 billion barrels/year. A good portion of this oil is consumed in the U.S. but other economies are beginning to compete for the supplies. As an example, this television piece pointed out, if China’s economy moved forward to a level that was approximately on par with Mexico’s current economy, the world demand for oil would increase to 142 million barrels/day or about 52 billion barrels/year.

While these estimates concentrated on the potential for consumption in China, they represent only one of many economies in the world that are expanding very rapidly.

Unfortunately the world wide for natural gas mirrors the demand for oil.

The oil companies want to build more refineries as a solution to the supply side of the equation. More refineries mean more imports and more imports mean an increasing trade deficit. The same oil companies want to build LNG ports to supplement the existing natural gas supplies. Again, this direction simply increases the balance of trade problems. Both of these actions will further increase the competition for fuels and place additional upward pressure on pricing.

The nation is debating the issue of “outsourcing” U.S. jobs. In fact, the oil industry may be the largest exporter of U.S. jobs. The U.S. spends billions of dollars on fuel each year. More than 60% of our fuel is imported to the U.S. from various nations. All of these dollars are providing jobs in other countries and not in the U.S. The argument can clearly be made that the fuel imports are necessary to meet demands and that there are no viable alternatives.

The question must be asked, is it possible to produce additional domestic natural gas and crude oil? Or, is it possible to find a viable substitute for imported oil and natural gas that can substitute domestic jobs and production for dollars that are being sent off-shore. Part of the solution may be created by the production of ethanol and bio-diesel, providing a direct substitution for imported oil. Part of the solution may involve development of more remote oil reserves such as those in Alaska, along the east and west coastal areas and in the Gulf of Mexico. These opportunities represent a possible way to reverse the “Outsourcing” of U.S. jobs through substitution for U.S. based employment.

Finally, the Nation is within 5 years of the beginning retirement of the “Baby Boomer” generation. Social Security, Medicare and Medicaid are already under severe pressures and will become bankrupt in the next 30 years unless something is done to make them viable – an indirect relation to energy. There are only three ways to make these programs viable:

  1. Cut the benefits to a level that can be supported. This means that we will need to tell millions of retirees that they are not going to get what they were promised.
  2. Increase the taxes that support these programs. To support these programs will require a doubling of the Social Security/Medicare/Medicaid tax. This action would create total economic stagnation of the U.S. economy.
  3. Increase U.S. jobs sufficiently to support the programs. Exporting U.S. jobs for any purpose is problematic. If living up to the existing “social contract” is going to be possible, it will be necessary to create more than 400,000 jobs each month in the U.S. This will mean that the economy will need to grow at a fairly rapid rate and that immigration will need to also increase to fill the jobs that will need to be created.

All of the issues indicated above are not only connected, but they provide a basis for the expansion and improvement of the U.S. economy. This is not to insinuate that solving the Nation’s energy issues is a complete solution for economic growth, but it is certainly part of the solution and may provide the best short term fix that is available.

Discussion:

  1. Supply and demand for petroleum:
    The nation’s capacity to refine oil has very nearly reached its capacity maximum. If demand for oil and gasoline continues to increase with increases in population, automobiles and trucks, along with an economic recovery in the U.S., a major shortage of liquid fuels may occur within the next two to three years. As this phenomenon occurs the price for liquid fuels will continue to rise.

    Refinery capacity is only one of the problems that may occur. Building new refineries or expanding existing refineries might provide some relief to a potential supply and demand imbalance, but it will also create an even greater negative trade imbalance and may not result in a readjustment in the price of these fuels.

    In the not very distant past, the U.S. was the world’s major consumer of liquid petroleum with many countries supplying to our ever increasing demand. One of the results of the collapse of the Soviet Union has been the expansion of the economies of many of the former Soviet States. Very recently the European Union expanded by 14 countries. This event will create a modernization and expansion of all of these economies along with an increased demand for liquid petroleum.

    The economies in the far-east including Japan, India, Pakistan and China continue to grow at a very rapid rate. As these economies expand their needs for liquid fuels continue to grow. The combined population of these Asian countries is much greater than all of the other “developed” countries. Therefore, as these economies expand the need for liquid fuels will expand at a much greater rate than most developed nations.

    Many of the economies in the western hemisphere are also expanding rapidly. Mexico and the Central American countries are experiencing rapid growth in their economies. With these expansions, the need for liquid fuels continues to grow.

    The result of the modernization of all of these nations will place almost unbearable pressure on the oil supplies in the world. Therefore, it is reasonable to conclude that over the long-term, expanding liquid fuel refining capacity in the U.S. and allowing consumption to increase without some form of tempering will only result in increasing prices for oil and gasoline.

    It is probably time for the oil companies to take a look at this situation and propose solutions that don’t require expansion of the refinery capacity or massive increases in demand for liquid fuels. Otherwise, the oil companies may, at some time in the future, be accused of “Killing the goose that laid the golden eggs.” Obviously, it is not only the U.S. economy that will be stopped when petroleum prices continue to rise, it will be the economies of many nations that will begin to suffer and slow down.

    OPEC has said publicly that they feel a price of between $25/bbl and $28/bbl is reasonable, but the price has risen above that level and does not appear to have any market pressure to soften. Building additional refineries in the U.S. certainly would not decrease demand for oil. OPEC would probably be happy if the price could be brought down since higher prices stimulate exploration and development of new oil supplies, many of which are not under the control of OPEC. These newer and more difficult supply sources need prices that are closer to $40/bbl to be economically developed. Therefore, OPEC tends to exert greater market power at somewhat lower prices. Unfortunately, increasing demand may make the higher prices a permanent condition for the world.

  2. Natural Gas supply and demand:
    Natural gas production in the U.S. and Canada has been declining. This is due in part to a reduction in drilling activities but it is, in large part, due to the exhaustion of the domestic supplies of currently produced natural gas. There are significant supplies of natural gas along both coasts and in the Gulf of Mexico. Many of these potential sites have been placed “Off-Limits” by both the Federal and State governments because of public pressure related to environmental impacts. As technologies improve the potential environmental impacts decline therefore, it is reasonable to re-visit the development of these resources periodically to determine if they can be economically and environmentally developed.

    When natural gas well-head prices were below $2.00/million btus, it was not economically feasible to develop many of the more remote natural gas supplies. But, with prices exceeding $5.00 at the well-head many of these development areas become economically viable.

    The choice between domestic development and construction of Liquefied Natural Gas (LNG) terminals is a devils bargain. Natural Gas industry leaders favor the development of LNG terminals. In fact a total of more than a dozen new terminals have been proposed.

    The first issue associated with these terminals is one of trade imbalance and the impact on the Nation’s trade deficit. Natural Gas has largely been a product supplied in the western hemisphere by western hemisphere suppliers. These supplies provide momentum for the western hemisphere economies and allow NAFTA trading partners to trade energy resources for U.S. goods and services. If LNG terminals are constructed it will begin a long-term drain on the U.S. economy that will benefit many countries that currently already have a poor trade balance with the U.S.

    A second issue, real or perceived, is the safety aspects related to LNG terminal facilities as terrorist targets. These proposed terminals contain massive amounts of energy that, if released by an event like the “World Trade Center” attack, could destroy everything within miles of the terminal. The only solution to this problem would be major “hardening” of the facilities. This additional construction could make these facilities very costly while still leaving them as potential targets.

    In 1978 when PURPA was passed it specifically excluded natural gas as a fuel for projects unless the projects met a certain efficiency standard. Over time the rules became more relaxed as it began to appear that natural gas was readily available at very low costs.

    Environmentalists saw natural gas as the “clean” fossil fuel and began to promote its use over other domestic fuels such as nuclear or coal for the production of electricity. The events at Three Mile Island provided the final straw that broke the camels back and the rapid expansion of base loaded natural gas plants began. These plants were less expensive to construct, natural gas was projected to remain at low prices, and the equipment efficiencies were improved to levels that were well above those of other fossil generation.

    Unfortunately, the original framers of the natural gas restrictions in PURPA have been proven correct. Their position was that natural gas should be considered a premium fuel that should only be used for electricity production when other fuels could not practically be used. An example of this would be using natural gas for highly variable electricity loads such as meeting daily demand swings. A reasonable case could also be made for using natural gas for meeting short-term electricity peaking needs as well.

    The genie was let out of the bottle, however, and now there are more than 200,000 MW of peaking and base load natural gas fired units in the power generation mix. Environmentalists still contend that natural gas fired units are the best way to produce electricity when compared to both coal and nuclear generation.

    With the increased price for natural gas the arguments against coal and nuclear are more difficult to sustain, with the exception for peaking generation requirements. Many environmental groups recognize that the price advantages to coal and nuclear are likely to move the market in that direction. Therefore, they rely heavily on the Not-In-My-Backyard (NIMBY) concept to prevent construction of these types of facilities.

    While it is true that many parts of the U.S. vehemently oppose construction of coal and nuclear plants, there are other areas that may be more receptive to their construction. Specifically, coal bearing areas might be very receptive to construction of mine mouth electricity generating stations that could provide large blocks of electricity to the grid.

    The environmental lobby understands this and therefore has taken a different direction in their opposition. In this case there is a strange bond between environmentalists, Investor Owned Utilities and the major railroads. These three groups, for completely different reasons create an opposition front to the development of mine mouth generation.

    The IOUs want to maintain their market monopoly positions in their local markets. Therefore bringing in inexpensive electricity by wire is not necessarily in their interest. Obviously, if the IOU is the producer of the electricity it will favor the project, but otherwise it will object since it creates competition in their marketplace.

    The railroads want to see coal plants developed, but they object to mine mouth generation as a way to avoid the rail transportation of the coal.

    The environmentalists simply object because of the environmental aspect of the coal fired energy production.

    The way these groups object to coal and nuclear development is by objecting to major improvements in the Transmission System across the U.S. If a major “Direct Current” transmission system was developed it would allow large blocks of electricity to be moved from coast to coast with reasonable line losses. This would improve the overall efficiency of the electricity system, but it would also provide an “Interstate Electricity Highway” that would allow coal producing areas to cost effectively construct new major facilities and would avoid the NIMBY areas of the U.S.

    What the environmentalists appear unwilling to recognize is that the development of a national “Interstate Electricity Highway” would also provide for the expansion of the Wind, Solar, Geothermal and Hydro-Electric industries.

    Geothermal, as an example is generally located only in the western U.S. If a major transmission system was developed, all areas of the U.S. would benefit from the development of geothermal energy, thereby reducing some of the need for fossil generation.

    Wind energy suffers from a lack of reliability. This factor could largely be eliminated through the construction of a major transmission system since wind project location diversity would provide an average amount of wind generated energy at all times.

    This article is the first if a two part series. Part two will be released tomorrow.

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