JUNK YOUR GAS FURNACE before it's too late. Congress has just decreed that burning Persian Gulf crude is going to be one of the most "sensible" ways to heat your home for the foreseeable future.
North America is awash with an almost perfect fuel -- natural gas. It doesn't cause pollution when you burn it. The rigs that drill for it don't cause anything like the environmental damage that strip mining does. You can heat your house with it, cook your food with it, run your factories with it, generate your electricity from it, make plastics and chemicals out of it and, if you convert it into methanol, even run your cars on it. And up to now, even at unregulated market prices, the stuff has been cheaper than Middle Eastern oil.
Well, it looks like you can kiss all that goodbye. A scheme hatched in the middle '70s in the hallowed name of American "energy independence," and just given congressional blessing, is about to make natural gas so expensive that it will doom its use at least until the end of the century.
This is going to happen because of something called the Alaska Natural Gas Transportation System (ANGTS). That's the name of a proposed gas pipeline from Alaska's North Slope, across the mountains and arctic wastes of Canada, to California and Illinois. The people who want to build it now figure it will cost $43 billion. That would make it the most expensive construction project in history.
(When originally proposed in 1977, ANGTS carried a $10.3 billion price tag. By 1979, the estimate had risen to $15 billion. Today, the cost estimates range from $39 billion to $48 billion. Some private observers are already estimating the final tab at as high as $54 billion.)
As a result, if the pipeline is ever built, and if it meets its construction deadlines and in fact does start to pump by 1987, the gas piped through it the first year is going to cost the public a minimum of $9 per thousand cubic feet. That works out to the equivalent of a $52.20 barrel of residual fuel oil.
"Resid," as it is called, is the primary alternative to natural gas in industrial and utility boilers, which is where most natural gas is burned. As such, its selling price is the effective ceiling on what industry will pay for an amount of gas with a similar heat content.
The current price for residual fuel oil is $28 a barrel.
That's half the price of the Alaskan gas.
In order for this to make the slightest bit of economic sense, therefore, the real price of oil, not counting inflation, has to double in the next six years.
The odds of that happening are slim to nonexistent. It's amazing how much oil the energy companies are finding, now that price controls have been lifted. In fact, the current oil glut is so pervasive, and so likely to last into the next century, that Ronald Reagan now even feels comfortable taking on an oil giant like Libya. There is only one way the oil glut is going to disappear. And that's for the Saudi Arabian oil fields to disappear. At the $43 billion price of the gas pipeline, that's a pretty expensive bet.
In fact, it's such an expensive and dubious bet that the banks and the oil companies that would normally be expected to put up the money for the pipeline won't touch it.
And that's where Congress came in this month.
The sponsors of the pipeline have coppered their bets through an amazing bit of financial legerdemain called "prebilling."
The prebilling provision of the waiver package that Congress passed for the pipeline is the most arrogant exploitation of the federal regulatory system in recent memory. It allows the pipeline's sponsors to charge consumers the full cost of building each segment of the line as it is completed, or if still under construction when an arbitrary "completion date" is passed.
This means the consumers will be paying for a transmission system even before it delivers any gas. In fact, even if the system is never completed, or if the gas proves too expensive to market, the consumer will still have to bear the full cost of whatever portions of the system are built.
The effect of this provision shifts the burden of risk from the investor to the consumer, without including the consumer in any of the benefits. By so doing, it transforms the project into a "cost plus" enterprise, eliminating any incentive to keep expenditures under control.
The explosive inflation that has brought the price estimate from $10 billion to $43 billion-and-counting graphically illustrates where this may lead.
But the truly outrageous part of this is that there is absolutely no assurance that the pipeline will ever be completed. Currently, there is widespread doubt in the financial community that ANGTS can attract the necessary investors, even with the waiver package. As one analyst noted, "If it's such a good deal, why did they need the waivers?"
No matter what happens, however, one thing is now certain: The consumer is going to be stuck with the bill.
How did this get through the Congress?
George Washington Plunkitt, the legendary New York political boss, put it best when he said, "Every good man takes care of his friends." Well, the pipeline sponsors made sure that they had lots of friends who were willing to take care of them. What is surprising is just who those "friends" were.
You see, the pipeline didn't have to court the Republicans, as they, for various reasons, already supported the project. Ted Stevens, the Senate majority whip, for example, comes from Alaska where 10,000 high-paying construction jobs are at stake. James McClure, chairman of the powerful Senate Energy Committee, and Pete Dominici, who chairs the budget committee, bought the idea that the pipeline was vital to national security, an argument that, as we will see, is spurious.
Where headway had to be made was with the "consumer-oriented" Democrats. The pipeline company pulled out all the stops to do this.
First, they hired Bob Strauss, former chairman of the Democratic National Committee, and political operator par excellance. But they didn't stop there. Next, they hired the law firm of Charles Manatt, current chairman of the DNC. Hedging their bets, they even hired former Vice President Walter Mondale as a consultant. And on top of that they donated $5,000 to the Committee for the Future of America, Mondale's political action committee.
One would think that these big guns would be enough, but the pipeline sponsors wanted to be sure, so the avalanche of cash continued (see accompanying box detailing political contributions as compiled by Bill Moyers for CBS News). The Democratic Congressional Dinner Committee got $27,000, 17 separate contributions went to the Democratic House and Senate Council, Warren Magnuson received three contributions. Enough, right? Wrong. Birch Bayh and Alan Cranston received contributions, as did Republican Pete Dominici. The list totals more than $70,000 in 1981 alone.
The question is, of course, did their friends "take care of them"? And how. The waiver zipped through the Senate by a vote of 79 to 17, after only an hour's debate. In the House, the margin was a little slimmer, and a few conservative Republicans tried to put up a fight, but a helpful leadership saw to it that the waivers were approved.
And all this for gas that even Darrel B. McKey, senior vice president of the Northwest Alaskan Pipeline Company, acknowledges will cost at least $9 per thousand cubic feet. Private analysts, meanwhile, have estimated that the final cost could be $22 per thousand cubic feet. Even the ANGTS estimate is three times the current average selling price for natural gas in the lower-48 states.
The actual impact of Alaskan gas on the consumer trying to heat his home will vary according to how much of the gas he uses comes from the North Slope. But, depending on whose estimates you choose to believe, if as little as 20 per cent of your gas comes from Alaska, your gas bill will rise anywhere from $450 to $1,095 per winter. And even that is based on the assumption the project's final price stays within current estimates, which is by no means what happened when the Alaskan oil pipeline was built.
The obvious thing for gas-using industries to do in these circumstances is to back out of that fuel as fast as possible. And that's exactly what they will do. As the commercial market thus dries up, pipelines selling gas, if any are left solvent after this debacle, may try to foist it off on residential consumers who lack industry's fuel-changing alternatives. Of course, it is also possible that no domestic pipeline will elect to purchase this high-cost gas, leaving us with a 4,800-mile white elephant.
This won't make any difference to the sponsors, though, as they will already have recouped their investment from the nation's gas consumers through the prebilling scheme. As might be expected, only the consumer will be left holding the bag. His options will be to either turn down the thermostat still further -- and, if he has a gas range, eat cooked food less often -- or buy a new furnace and stove that operate on "cheap" Persian Gulf oil or the electricity that comes from burning it.
Ironically, the Alaska gas pipeline, which was intended to increase the availability and use of domestic gas supplies, will have exactly the opposite effect. Moreover, this effect will be felt at exactly the time that huge new gas discoveries are being made.
Drilling for both oil and gas has been proceeding at a hectic pace over the last few years -- with remarkable success. This year, for the first time since the mid-'60s, new oil discoveries have exceeded consumption. And new gas discoveries have also risen sharply, nearly equaling what we have consumed. As this trend continues, it is expected that in the not-too-distant future, new gas discoveries in the lower-48 will, like oil, begin to exceed consumption.
It really is amazing how much oil and gas people find when there's an economic incentive.
These new finds refute the contention that domestic supplies of natural gas are running out, a fear which sparked the original interest in building a gas pipeline from the North Slope.
More important, recent estimates by everybody from the U.S. Geological Survey to the Colorado School of Mines indicate that vast amounts of natural gas remain to be developed in the lower 48. Even if you exclude Alaskan gas, it looks like we could maintain current levels of consumption for from 36 to almost 50 years.
In addition, both Canada and Mexico have vast natural gas supplies which they are more than willing to sell to us.
In light of these readily accessible and relatively inexpensive sources of energy, the question one must ask is "Why Alaska?"
Some proponents of the project have automatically answered "national security."
That answer, however, is hogwash. Natural gas adds to our national security only to the extent that it brings about the displacement of imported oil. As we have seen, the introduction of Alaskan gas will have exactly the opposite effect.
Others will say the pipeline is necessary to insure continued availability of fuel. But here again, the existence of substantial supplies in more accessible locations readily refutes that contention.
The pipeline makes no economic sense. It makes no ideological sense if you have the slightest regard for a free market. And it makes no political sense.
The simple truth is that the pipeline is the product of a combination of political expediency and greed. Political expediency on the part of politicians who do not understand the extent of our energy resources or who do and are willing to ignore them. Greed on the part of the pipeline's sponsors, who want the consumer to bear the risks while they reap the rewards.
The only bright spot in this whole mess is that many analysts believe that the pipeline is such a turkey that its sponsors willif have to come back to Congress again. This time asking for a federal subsidy.
Maybe we can kill it off then.