Many public voices today want the government to simply mandate lower energy prices. It is this kind of temper-tantrum-as-policy that makes the Middle Ages seem so, well, medieval, and reminds us...
The New Gas Wisdom
Unconventional gas sources put a ceiling on future prices.
lower. But more daring players were willing to place bets on this new vision of a global (and pricey) natural gas market. This included aggressive investment in re-gasification capacity—and the political battles such an effort entails—as well as strategies focused on optimizing the mix of midstream assets, including processing, pipelines, and storage, to accommodate a new series of gas flows and product characteristics. This perspective also created a focus on coal, renewables, and nuclear generation assets among players in the U.S. power sector. All would benefit from the high marginal electricity price umbrella supported by expensive natural gas.
This bullish outlook for natural gas also implied a higher cost for establishing mandatory global greenhouse gas (GHG) regulations in the United States under the various cap-and-trade regimes being debated. Seeing this relationship requires a bit of insight into the likely power industry sources of CO 2 and its equivalents in the U.S. electricity sector. Given the range of electricity sector CO 2 reductions in much of the legislation under consideration, the price of CO 2 would need to be high enough to induce replacement of base-load coal capacity with new gas-fired combined-cycle capacity. Thus the price of CO 2 and the price of natural gas would be linked. Furthermore, a view premised on high-cost domestic natural gas and a constrained—economically and/or politically—supply of LNG from foreign sources implies that cost and security issues would preclude the United States from relying on natural gas as a bridge to a lower carbon electricity sector, leaving renewables and conservation as the only near-term options for new generation in a carbon-constrained and tightening U.S. power-generation sector. At the higher level of gas prices implied by the new orthodoxy, an even moderately aggressive, pure cap-and-trade GHG policy began to look politically challenging (see Figure 4.)
The reality of historically high gas prices, and the prospect of sustained high prices in the new convergence era, had important consequences for the natural gas sector, beyond spurring strategies focused on investing in a globalized gas infrastructure. First, demand destruction in the industrial sector and all-electric residential supply penetration in rapidly developing regions of the United States ( i.e., the South) accelerated. Second, and more significant, investment in unconventional domestic natural gas took off. Accompanied by little noticed breakthroughs in the art of exploiting shale, tight sands and coal-bed methane (CBM) reserves by numerous independent upstream producers and their service firms, production began to take off in the 1990s. The technology improved and became increasingly available using new work processes and techniques, resulting in a decline in production costs and buoyed investments in new unconventional production. The novelty of these developments, and perhaps because they were led by heretofore lower profile firms, resulted in a significant underestimation of natural gas production by the U.S. Department of Energy’s forecasting arm, the Energy Information Agency (EIA). For example, actual production in 2006 was more than double what the EIA forecasted in its 1998 and 2000 Annual Energy Outlook reports (approximately 4 Tcf short each year). Indeed, every forecast since 1998 has required significant