The Problem with Natural Gas
7.14.05 Frank Clemente, Senior Professor of Sociology and Energy Policy, Penn State University
In 1997, Joseph Riva, senior geologist writing for the Colorado School of Mines, turned a skeptical eye toward the rapidly emerging dependence of the United States on natural gas (NG). Riva suggested that the rush to embrace NG as the primary fuel to meet incremental electricity and space heating demand was based more on sociopolitical hope than on geological reality. Noting that domestic NG production had peaked at 22.6 tcf in 1973, Riva questioned not merely whether the EIA projected production of 25.5 tcf by 2015 could be met but even whether the then current output of 19.8 tcf could be maintained. Basing his analysis on the level of known reserves and the rate of new discoveries, Riva argued that unless an unprecedented number of large fields were found soon:
“by early next century, natural gas will have become more of an energy problem than an energy solution”.
Subsequent events have provided ample support for Riva’s grim assessment: (1) domestic NG production only reached 19.7 tcf in 2004 despite an additional 461 rigs in the field—an 82 % increase over 1997; (2) NG well head prices have steadily escalated from $2.10 mcf in 1998 to $ 6.31 mcf in the first four months of 2005 – an increase of $ 4.21 ( 200 %); and (3) chief U.S. policy makers (e.g., Alan Greenspan) now readily admit the nation cannot meet its NG supply needs and will be increasingly reliant on imports from politically unstable areas – darkly paralleling our current dependence on foreign areas and the entailing socioeconomic costs.
In essence, Riva’s foretelling is coming to pass. The present paper takes his concerns as a point of departure to delineate a range of reasons as to how unless the United States begins to take the NG supply / demand situation more seriously, NG is likely to move from the role of energy boon to national liability.
THE SPECTER OF DEMAND SHOCK
Given the status of NG as the cleanest of the fossil fuels, a confluence of environmental regulations, efficiency of combustion and simple convenience has led to an unprecedented build-out of the NG demand infrastructure – particularly through massive construction programs for power plants and new single family homes. Yet, despite this increased dependence on NG to supply electricity and heat our buildings, the casual observer of business news would be hard pressed to find a systematic discussion of the commodity. The price of oil has its own ticker on television business networks but NG may or may not be mentioned in a given day. As a result of this benign neglect there is only dawning recognition that a shortfall of NG may soon reverberate throughout the socioeconomic system – harkening back to the 1970’s with the closing of schools and businesses in the dead of winter, reducing manufacturing production and leaving millions of homeowners wondering how they are going to pay their heating bill.
The stunning realization of the NG problem, however, is only a sustained heat wave, hurricane, frigid January, coal strike or nuclear shut-down away. And when that day comes the U.S. will come face to face with a series of NG demand issues looming ever larger on the horizon:
(1) Construction of NG heated homes – throughout the 1970’s and 80’s electricity was the preferred space heating source for newly constructed single family homes. In 1979, for example, 51% of new homes were heated with electricity as opposed to only 39% with NG. Over the past decade, however, NG has clearly become the fuel of choice in 70% of new homes with electricity dropping to 27%. In fact, over the period 2001-2004 over 3.3 million new homes heating with NG have come on line – over 70,000 per month. Further, the construction of new homes is hardly slowing as the most recent housing data indicate that single family homes heating with NG are growing at an annualized rate of over 1.1 million. Finally, these homes are being constructed in regions with harsher winters .The latest American Gas Association data indicate 92% of new homes in the Midwest heat with NG as opposed to only 48% in the South.
(2) Construction of NG fired power plants. The NG shortages of the 1970’s prompted the passage of the 1978 Fuel Use Act (FUA) effectively banning NG fired electric power plants as well as the use of NG in large industrial boilers. These restrictions on NG consumption led to a substantial decline in demand and the eventual formation of a supply “bubble” – which in turn resulted in chronically low NG prices (See EIA, 2005). In 1987 much of the FUA was repealed setting off a surge in the construction of NG power plants. Indeed, NG consumption for electric generation rose from 2,636 bcf in 1988 to 5,352 bcf in 2004 (a 103 % increase). In fact, since the 1990s virtually all new power plants have been NG units in an historic departure from the traditional fuel diversification strategy of electric utilities------------------------------------------------------------------------------
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