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Fossil Fuels and Energy Policy: Understanding the New Natural Gas Economy

How gas supply and price disruptions now outweigh oil imports as the nation's real energy problem.
Fortnightly Magazine - November 15 2000

in its 2000 projection, EIA reduced this to 105 GW between 1998 and 2015. 8

In any event, the close relationship between resolving the current U.S. gas supply problem and solving the power supply and reliability problem is evident. There is, of course, plenty of justification for optimism. The independent and major producer segments are responding quite rationally to price expectations nearer to $4 per million Btu over the next several years, rather than the relatively unanimous predictions of forecasters as recently as December 1999 and January 2000 of wellhead prices in the range of $2.00 to $2.50 per million Btu. There is certainly no basic resource problem. Those gas reserves and resources in the lower 48 states that are technically recoverable total somewhere between 1,500 and 1,700 Tcf. It only takes continuing technology advances and fewer restrictions on where one can drill for these resources to make a major portion economically recoverable at prices that still make natural gas-fired power generation attractive. Substantial investments in more pipeline and storage capacity also are needed to ensure reliability of gas service for all users. Obviously, power prices from gas-fired generation cannot compete with the variable costs in the 1 to 2 cents per kilowatt-hour range of existing, substantially depreciated coal-fired and nuclear capacity. However, judging from the relatively high prices paid by independent power producers for this capacity as it is being divested by utilities, expectations are still high for meeting most of the new capacity needs with gas-fired turbine plants. That expectation remains despite the substantially higher variable costs of such plants (3 to 4 cents per kilowatt-hour, assuming a gas price of $4 per million Btu). In addition to the highest gas drilling rates since the late 1980s, other positive developments are substantial projected increases in Canadian and liquefied natural gas imports, currently at about 3.5 Tcf per year.

Lessons for Policymakers

Policy and other decision-makers must balance their current preoccupation with what has been a long-term problem of oil import dependence and the resulting large price fluctuations, with greater emphasis on the closely interrelated natural gas and power supply problems.

In particular, that means accepting the idea that price and supply disruptions in natural gas play represent the real energy problem facing the United States. This increased importance stems in part from partial electricity deregulation, which has shrunk generation reserve margins and has lowered incentives for investment in generation and transmission facilities.

Today it appears doubtful that there will be any significant investments in new coal-fired steam-electric plants (which now supply over half of U.S. power requirements), or in the still very costly "clean coal" technologies (which do not adequately address the problem of emissions of carbon dioxide and greenhouse gases). There are certainly no near-term prospects for construction of new nuclear power capacity, which still represents nearly 100 GW of the 800 GW of total utility and non-utility U.S. generating capacity. About 40 GW of this nuclear capacity is nominally slated for retirement by 2020, even though it produces no air pollutants and greenhouse gases.

Therefore, there is only