Our Next Shortage
By Robert J. Samuelson
Thursday, June 17, 2004; Page A29
American energy policy is nothing if not shortsighted and self-indulgent. By the early 1970s it was clear that we faced a long-term oil problem because (a) the country inevitably depended on imports and (b) two-thirds of global oil reserves lay in the Middle East -- where politics and instability made a catastrophic loss of supplies a permanent danger. What did we do? Well, Congress took some sensible steps in the 1970s. It created gasoline efficiency standards for vehicles and a Strategic Petroleum Reserve (SPR). But low oil prices in the 1980s and 1990s led to backsliding. The SPR wasn't adequately expanded, and drivers flocked to SUVs, which are governed by less stringent fuel mileage standards. Americans preferred cheap gasoline to long-term prudence.
When oil prices hovered around $40 a barrel, pundits screamed for an energy tax (a policy I've long advocated). Although that's desirable, it won't bring much immediate benefit, because there are more than 230 million vehicles on the road. Any shift toward fuel efficiency will take time. A smart energy policy operates over years and decades, not weeks and months. The question that we ought to be asking -- and aren't -- is whether we're similarly blundering with natural gas. Given our history, that seems a good bet.
Natural gas is the heating fuel of about half of U.S. homes (51 percent in 2001). Since 1993 it has been the fuel used for almost 90 percent of new electricity generation; in effect, natural gas powers the Internet and most PCs. It is also a major fuel for manufacturers and for heating office buildings. In 2002 about half of gas sales went to industrial and commercial users. The trouble is that we're no longer self-sufficient in natural gas -- and our import dependence will grow.
In 2003 Americans used about 22 trillion cubic feet (tcf) of natural gas, up from 19 tcf in 1990. By 2025 consumption will be 29 tcf to 34 tcf, projects the Energy Information Administration. If we don't import more or expand domestic production -- or both -- those projections won't come true. Prices will rise, choking demand; or, shortages will occur. Some factories that need gas will move to countries with cheaper and more reliable supplies. Already, prices have risen. In the 1990s wellhead prices (the price where the gas leaves the ground) averaged about $2 per thousand cubic feet. In 2003 they averaged almost $5; now they exceed $6.
Until now Canada has supplied most of America's needed imports (a sixth of consumption in 2003) via pipelines. But Canada may not have enough gas to sell increasing amounts to the United States. On paper, the solution is to import liquefied natural gas (LNG). Plenty of gas exists worldwide, much of it outside the Persian Gulf, for conversion into LNG. Moreover, the costs of building liquefaction plants have dropped 60 percent since 1990, says David Victor of Stanford University. Four U.S. terminals already exist to import LNG. At least 35 others have been proposed, says Chris McGill of the American Gas Association. The question is whether enough will ever be built.
The hallmark of U.S. energy policy is a steadfast refusal to confront choices. On oil, Americans want low prices and secure supplies, which are inconsistent. The lower the price, the less reason to buy fuel-efficient vehicles. The more oil we use, the more we import -- and the greater our vulnerability to a catastrophic loss. Fortunately, that hasn't happened yet. Although today's high oil prices may slightly hurt the economy, they're more of an inconvenience than a tragedy. Still, people must now realize that many dangers (terrorism, war, revolution, political extortion) could trigger a huge -- and tragic -- loss of Middle East oil for which we are utterly unprepared.
A similar unreality afflicts natural gas policy. It's a favored fuel. For electricity generation, it's cleaner than coal and less fearsome than nuclear power. But we also restrict drilling: Waters off the East and West coasts are prohibited, as are parts of the Gulf of Mexico; producers complain about approval delays in Rocky Mountain states. New drilling remains essential because production from existing wells drops more than 25 percent annually.
There's also intense local opposition to some proposed LNG terminals. It's based heavily on exaggerated safety fears. The LNG will not explode, and vaporizing gas will burn only under limited conditions. The Federal Energy Regulatory Commission (FERC) says that over the past 40 years there have been 33,000 LNG tanker trips without a serious accident. Can proposed LNG terminals overcome local resistance? FERC contends that it -- and not state and local agencies -- has exclusive authority to approve onshore LNG terminals. But that's unclear. The courts or Congress will have to settle the issue. The more agencies involved, the harder approvals will be.
A country that stimulates demand and restricts supply courts trouble. Congress could resolve the contradiction. It could relax drilling restrictions and encourage imports. It could subsidize Alaskan natural gas. It could promote coal and nuclear power. Or it could suppress energy use through tax policies that raise fuel prices and discourage large homes. But Americans like none of these choices. So Congress waffles. If natural gas scarcities someday emerge, people will ask, who did this to us? And the answer will be: We did.
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