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Energy Policy

(Energy) Independence Day – Part I

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The Addict

The United States is the largest consumer of energy in the world, and one of the most wasteful. Our needs far exceed our current domestic capacities to produce energy, and Americans are notoriously reluctant to adopt energy saving technologies. As a result, American foreign policy revolves around the primordial need to keep the energy flowing.

That makes sense: energy is the most fundamental input to our economy, our civilization, to life itself. But the current situation has a number of very severe implications.

For one thing, it makes our foreign policy subject to the whims and vagaries of penny-ante autocrats in any state that happens to export oil. How contemptible that a third tier power like Iran can hold the global economy and our great Republic hostage merely from sitting astride the Straits of Hormuz. Without our dependence on oil, our strategic focus would shift almost entirely to the Pacific and Eastern Europe.

 

Oil dependence generates economic costs as well. Energy prices are a significant cost component in many manufacturing industries, like steel, glass, chemicals and plastics. The greater the US dependence on foreign energy imports, the more exposed these industries are to fluctuations in the price of energy. The trend in oil and gas prices has been upwards for the past decade, and this as contributed in part to a lack of competitiveness in sectors of the US economy.

Light at the End of the Tunnel?

Not all is dark in the US however. In fact, America is undergoing an energy renaissance that promises to fundamentally change the nation’s energy situation. This is due to the recent fruition of long-running research and development in drilling techniques and equipment, which has led to the development of hydraulic fracturing (“fracking” for short).

Fracking consists of using a mixture of water and chemicals injected under high pressure into wells drilled in rock where not easily extractible oil and gas deposits exist. Under this pressure, the rock fragments, releases the oil and gas, and allows them to be collected. It sounds simple in practice, but it has taken decades to perfect the techniques that make fracking a commercial success[1].

Fracking has its critics, but there is no disputing the amazing increase in natural gas production that it has made possible:

 

Unlike oil, which is relatively easy to transport and therefore has a global market, natural gas is more difficult to ship overseas. That means that U.S. gas is largely confined to the North American market, leading to a four-fold decline in the price of gas for consumers. Not only do individuals benefit from this drop in price, making it far cheaper to heat their homes: it has led to a revival of manufacturing fortunes in a number of industries

Europe and the UK have seen gas prices continue their upwards trend from $2/mBTU in 1996 to $10/mBTU in 2011. Japan, which is heavily dependent on imported gas and which cannot pipe it in directly from Russia as Europeans do, has seen an even higher increase, to $14/mBTU for liquefied gas brought in by tanker. Meanwhile, thanks to fracking, prices of natural gas in North America have dropped from $9/mBTU to just under $4/mBTU[2]. Harald Schwager, member of the board of Germany chemical giant BASF SE has commented, “Production costs with shale gas are lower than anything we can achieve in the short term in Europe.”[3]

The fall in gas prices is large enough, and the future potential clear enough, that analysts are talking about the “Renaissance in the Rust Belt.” [4]

  • Egyptian Orascom Construction has announced plans for a $1.4 billion fertilizer plant in Iowa, the first new large fertilizer factory built in the US in 20 years.
  • U.S. fertilizer maker CF Industries will invest $2 billion to expand production facilities.
  • Alleghany Technologies is building a $1.1 billion mill to manufacture metal alloys in western Pennsylvania.
  • Dow Chemical, Royal Dutch Shell and Chevron Phillips Chemical have also announced multi-billion dollar investments in Texas, Louisiana and other states.

Fracking has also increased the production of domestic oil without the need to drill in remote or difficult environments, such as the Alaskan ANWR or deep-water continental shelves. In 2008, oil imports dropped from the impact of the Great Recession; but after a very modest increase in 2010, oil imports have continued to drop. This change in the secular trend is leading to an improvement in our balance of trade as well as improving our strategic leverage vis-à-vis the oil producing nations.

 

Until now, the attitude of the government towards fracking has been largely one of “benign neglect”: the Federal government did fund much of the early research back in the 1970’s, until the oil and gas industry largely took over that role. Beyond that, the Feds have let fracking companies operate without too much interference. That’s usually the wisest course: let business take care of business, as long as they’re not setting the water table on fire.

In additional, it is worth noting that U.S. laws favor fracking in another way. In the U.S., anything under someone’s property, any mineral wealth specifically, belongs to that person. In other regions of the globe, like in many European countries, anything underground belongs to the state. That is not a total bar to investment, but it does mean that Europe will never experience the massive entrepreneurial investment that has characterized the rise of U.S. fracking, with literally hundreds of companies getting into the business and negotiating for drilling rights with private landowners. It will be an industry dominated by large corporations with major state intervention and all of the bureaucracy and inefficiency that entails.

The Ugly Stepsisters

We cannot power a nation and an economy as large and diverse as ours without exploiting almost every energy resource we have at our disposal. The boom in gas and oil is very welcome, but these two energy sources alone cannot and should not power the entire economy. We should not, for political reasons alone, exclude certain forms of energy production, like nuclear or coal. These are the only two forms of energy production that have actually fallen, both by -4.8%. Both are significant energy sources: coal accounted for 28% of our 2011 primary energy production, while nuclear was 11%.

Environmentalists would dispute my arguments and counter that coal is the dirtiest of all energy sources as a releaser of greenhouse gases, while nuclear energy is both inherently dangerous and also a terrible pollutant through the radioactive waste left over from the fission process. All of this is true and valid. But there are powerful reasons why coal is not going away.

Coal is plentiful.  The proven coal reserves of the United States, if converted into oil equivalent, exceed the proven petroleum reserves of the entire Middle East.

 

Not only is coal plentiful, but it is not distributed evenly around the globe. Certain nations have larger reserves than others:

The United States has the largest proven coal reserves by a significant margin, more than a quarter of the entire world’s reserves. The US has more coal than all the rest of the Americas, all of Africa, all of the Middle East, all of Europe and India combined.

Look where else the coal is: China, India, and Germany, all major industrial or industrializing countries and all large energy importers. China and India also have an important strategic reason for exploiting their coal deposits: both depend on oil imports from long supply lines overseas to the Middle East. China worries that the US Navy could easily cut these supplies in any future conflict, while India also looks at Pakistan, so near the sea lanes from the Persian Gulf. Is it any surprise that China and India are building coal-fired power plants as quickly as they can pour the cement?

Russia and Australia also have large reserves. Neither is likely to use it domestically: Russia has plentiful supplies of cheap gas of their own, and Australia’s population and industry does not require massive amounts of coal power. But they will be happy to export it to the energy guzzlers on demand, and coal is very easily transported by sea and rail.

Coal is cheap. If we compare price of coal, crude oil and natural gas[5] it is evident that coal is the cheapest of the fossil fuels. Of course, this straight comparison is not exactly fair, as the spot price does not include other factors like transportation, transformation and limitations of usage. Still, it is a useful indication that coal will be exploited more as the price of oil rises, and it will place substantial pressure on expensive renewables to compete without subsidies or without a carbon tax on coal.

 

Yet coal critics are right: it is hazardous to human health to produce, and it is the dirtiest of the fossil fuels to burn. Opponents would like to place a carbon tax on coal to raise the price above that of renewable energy sources, thus generating revenues for governments and discouraging the use of coal in industry. That might work in the United States and Europe – while other sources of energy remain available – but neither China nor India seems likely to follow suit.

Another alternative is to invest heavily in technology. The coal industry is collaborating with government to develop a new generation of environmentally friendly technologies which will clean-up the coal industry and reduce greenhouse gas emissions. These involve improvements to the carbon scrubbers which take the waste CO2 from power plant smoke stacks in the same manner an air filter might trap dust from a home HVAC unit. Once that carbon is captured, it needs to be stored, which is why carbon sequestration is being investigated with great interest.

Carbon sequestration involves chemically combining the carbon with other elements to form inert materials and then injecting these into the earth so that they do not decompose and re-release the trapped carbon. That’s the theory. This technology is not proven capable of reliably sequestering the large volumes of carbon which would need to be trapped if a large-scale move to coal was made. There are also concerns about the stability of the underground deposits involving potential for seepage, formation of carbon bubbles and other possible disasters. So far, carbon sequestration is little more than pumping the carbon underground without any guarantee of whether it will stay there

Governments of major coal nations should increase funding as well as mutual efforts at cooperation to advance these technologies and others, such as robotic miners that would no longer oblige human beings to risk their lives and lungs in the depths of the earth. In the long run, the potential for coal power is too important to ignore.

While coal is cheap and dirty, nuclear power is clean but expensive. Not expensive to produce electricity: once up and running, a nuclear power plant generates the cheapest energy of all for decades. In fact, all 104 nuclear reactors in operation in the United States are at least 30 years old.[6]

Safety concerns and pressure from local groups (known as “not in my backyard” NIMBY) cause the siting and licensing of new nuclear power plants to be a difficult and tedious process, costing millions of dollars and months or years of delay before even breaking ground. Concerns around radioactive contamination, potential “China Syndrome” scenarios and the threat of terrorism to fissile material all combine to impose a regulatory cost on nuclear operators that electrical generation using fossil fuels do not face (despite the fact that an oil cracking station is an immensely volatile place, and a coal mine is not exactly a health spa either).

Yet no national strategy to reduce carbon emissions in the short-term can realistically do so without recourse to nuclear power. From the point of greenhouse gas emissions, nuclear power is as clean as any renewable. It also has the advantage of producing power whether the sun shines and wind blows or not. During President Obama’s first term, the Administration made a major push in favor of nuclear power. These plans were derailed by the disaster at Fukushima, and the problem of NIMBY grew once again grown to monster proportions. That is precisely why government support remains critical.

In response to the Nuclear Power 2010 Program (established in 2002) Westinghouse Electric Co. developed a new generation of nuclear reactor design[7]: cheaper to build, simpler to maintain, safer to operate. It required far less space and fewer parts than traditional designs, as well as incorporating new safety features that took advantage of technological advances as well as the enhanced threat environment in the wake of the 2001 terrorist attacks. The Nuclear Regulatory Commission approved in 2010 the construction of 4 new civilian reactors based on the Westinghouse design, the first such authorizations in 34 years.[8] The first of these is scheduled to come online in 2016 in Waynesboro, Georgia. The disruption caused by Fukushima and the disunity among political and citizen stakeholders continue to retard progress and dampen industry enthusiasm in such large-scale and uncertain investments. The U.S. nuclear renaissance still seems to be a few years off.

The bright promise of nuclear energy has always been “a few years off.” Even as the public became fearful of fission technology, supporters waited for the Holy Grail of fusion power. Fusion technology depends on the fusion of hydrogen particles rather than the decay of uranium to generate heat, and so produces no radioactive waste. Unlike the weaker (!) fission reaction, which can occur at normal temperatures assuming a critical mass of fissile material is present, the fusion of hydrogen can only occur at temperatures found in stars.

Fusion technology has been with us since the 1950’s in the shape of the fusion bomb, which uses a fission explosion to generate the necessary temperatures for the fusion reaction to begin, and are by definition “uncontrolled” reactions. This is not particularly useful for civilian power generation. Creating the appropriate environment and controlling the fusion reaction requires power “magnetic bottles”[9]: so far, the power required to control the hydrogen interactions is greater than the power generated by these reactions.

Even assuming that the complex technical innovations needed to create a working and economic fusion reactor are overcome, and surely they will be given sufficient time, who is going to want a power plant harnessing the power of a micro-star in their backyard? Whatever the security measures in place, the fear of a runaway fusion explosion will limit the practical deployment of fusion generators to very remote and uninhabited locations, essentially deserts and off-planet[10].

The Cost of Action and Inaction

The story of fracking and the boom in the oil and gas industry is only one narrative. Renewables have experienced an even greater surge thanks to the surge in oil prices and government support. Between 2009 and 2012, total renewable energy production has increased 23%[11], greater than the increase in natural gas production during the same period (15%). Renewables have gone from 8% of primary energy production in 2000 to 12% in 2012. This impressive increase has been due mostly to market forces, but the role and support of the public sector is also undeniable.

The story of renewables is as compelling as that of fracking, but it is has problems of its own. Consider where the growth in renewables has actually occurred:

 

All sources of renewables have increased, but there are severe geographical limitations to the potential increase in hydroelectric and geothermal production.[12] Solar has increased impressively (almost 300%) but from a tiny base and total solar generation remains insignificant. Wind power has experienced the most impressive increase of any renewable (almost 700%!) and despite its problems, it is remains easily scaled and underdeveloped.

The largest increase in absolute terms has been in biomass production. This is principally biofuels made from corn. It has the benefit of helping curb our dependency on imported oil for conversion to gasoline and diesel, something that other renewables and nuclear[13] are currently unable to substitute. The main drawback, however, is that mandated biofuel production is absorbing an ever increasing percentage of the US domestic corn crop, and provoking the conversion of more land to corn production. As this summer’s drought has demonstrated, this has serious and perhaps unintended consequences on food prices and food security. Biofuel production will continue, but there is doubt as to how much further it can increase.

The vast increase in renewables has come at a cost. The government has subsidized the production of renewable energy, which would be uncompetitive with fossil fuels otherwise. Federal subsidies have increased substantially from 2007 to 2010, with wind subsidies more than doubling to $56 per megawatt-hour and solar increasing by 300% to $775 per megawatt-hour. Compare these subsidies to those received in 2010 by the coal, oil and gas industries: less than $1 per megawatt-hour, and $3 per megawatt-hour for nuclear.

 

The first and most obvious question is why oil, gas and coal are being subsidized at all. These are globally competitive and highly profitable businesses, these subsidies would appear to be the sort of misappropriation of public funds which Republicans rail against. Of course, the Republicans of the 112th Congress fought tooth-and-nail to keep these subsidies in the Federal budget even while demanding austerity cuts from other programs. The government could save almost $2 billion per year if fossil fuel subsidies were eliminated.

Conservatives would argue that ALL Federal subsidies to energy should be eliminated and that the market should be allowed to decide which energy sources to develop. However, that approach is flawed for the very simple and obvious reason that the market does not take into account the externalities associated with choosing one energy source over another. The most obvious of these externalities is the very real and very substantial economic costs associated with climate driven extreme weather events.[14]

If we look at 2012, we can count 11 different extreme weather events affecting the United States and costing more than $1 billion in economic damage.

 

Hurricane Sandy and the summer drought were the largest and most destructive events, each costing the US economy upwards of $30 billion dollars. The other events: tornados, flooding, severe snows, hurricane Isaac, were smaller but also contributed a total of approximately $20 billion in damages. All told, the United States suffered between $80 billion and $110 billion in economic losses.

If those losses were to be assigned to the industries that generated the pollution[15] which is contributing to climate change, we would have a more accurate picture of the “hidden” subsidies that markets aren’t taking into account when they price energy sources. Renewables, nuclear and hydroelectric energy sources do not contribute to greenhouse gas emissions, so we look at the contribution by the fossil fuels to primary energy production[16]:

 

If we then assign the costs of extreme weather losses proportionately to each of the fossil fuels, and divide by the total megawatt-hours generated by each of those fuels, we arrive at the complete picture of the Federal plus “hidden” subsidies to each energy source:

 

It is arguable whether or not the full cost of the year’s weather events should be assigned to fossil fuels and the pollutions they cause; but this methodology is much better than the blind eye the market turns to the economic costs of climate change. It clearly shows that the “outrageous” subsidies for renewables are actually quite modest in the case of wind power, and in-line with the other fossil fuels for solar power generation. Any serious debate around energy must include a broader interpretation of the fully-loaded costs of each energy source.

Not Just Generation

So far we have considered only the “upstream activities”, namely the sourcing of energy sources. Exploration and extraction are only a part of the energy cycle however: transportation, generation and transformation, transmission and distribution/consumption form the other stages[17], and each has tremendous potential for improvement. Enormous quantities of energy are wasted in each step of the process, mostly in the form of unutilized heat.

 

It is one thing to find cheap and abundant sources of energy. However, even existing energy stocks can be extended and utilized more efficiently if the losses in generation and transmission were mitigated, or if the growth in consumption were slow due to improvements in technology and usage. It’s not a question of “tree huggers” switching to bicycles instead of SUV’s either: industry and government are major (and oft inefficient) consumers of electricity and petroleum fuels. Citizens can also make more rational choices that result in both economic gains for them and lower consumption.

In Part II:

  • Improving Efficiency in:
    • Generation
    • Transmission
    • Consumption
  • Needed: A National Energy Program


Sources and Notes:

[1] In fact, fracking has been around since at least the 1860’s in a primitive form.
[2] Japanese and European prices are CIF (cost + insurance + freight); UK prices from Heren NBP Index; US prices are Henry Hub; Canadian prices are Alberta. BP World of Energy Statistical Review 2012
[3] Torello, Alessandro, “Lower  U.S. Costs Pose Challenge for Europe,” The Wall Street Journal, 25 October 2012
[4] Casselman, Ben and Gold, Russell, “Cheap Natural Gas Gives Hope to Rust Belt in U.S.” The Wall Street Journal, 25 October 2012
[5] Conversion has been made to megawatt-hour of electricity as a useful common measure using the following conversion metrics:

  • 1 barrel of oil = 0.1364 tonnes oil equivalent= 1.6358 megawatt-hours
  • 1 million BTU gas =0.025 tonnes oil equivalent = 0.3 megawatt-hours
  • 1 tonne of coal = 0.6667 tonnes oil equivalent = 8 megawatt-hours

[6] Nuclear Energy Review, US Energy Administration, 26 June 2009
[7] Llanos, Miguel, “Nuclear renaissance? U.S. Oks new reactor design,” NBC News, 22 December 2011
[8] Rascoe, Ayesha, “U.S. approves first new nuclear plant in a generation,” Reuters, 09 February 2012
[9] Illustration of fusion reactor is from the Culham Centre For Fusion Energy
[10] This is not idle speculation. Mars has a far higher concentration of “heavy water”, deuterium, which is the ideal fuel for fusion reactors. Fusion technology could make Mars commercially viable both as a user and a source of deuterium for fusion power.
[11] Table 1.2 Primary Energy Production by Source, September 2012 Monthly Energy Review, U.S. Energy Information Administration, 26 September 2012
[12] There are only so many locations where a geothermal plant is practical, and only so many rivers you can dam. Until tidal power generation develops beyond the experimental stage, the expansion in hydroelectric power is strictly limited.
[13] Unlike in “Ghostbusters” no one wants to carry an unlicensed nuclear accelerator near their person. This only holds true until the development of electric cars allows vehicles to be “refueled” directly off of the power grid.
[14] I will not explore the science of climate change in this article. Suffice it to say that every reputable internationally recognized climatologist agrees that man-made climate change is real and that the impacts are unpredictable, but large.[15] U.S. Greenhouse Gas Emissions Flow Chart, World Resource Institute; Department of Energy

 
[16] Primary energy production refers to the first stage of production of various forms of energy, converted into a common unit (metric ton of oil equivalent). This is a good measure since it takes into account all end uses of the energy.
[17] The illustration I provide is a very visual, but simplified model of the energy value chain. A more detailed one is provided here by the Center for Energy Economics:

 

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