Tuesday, October 13, 2009

Cheap Energy Geography

Cheap energy is back. Marketplace aired an incredible story Monday morning. The interviewee is the journalist of an article in the British newspaper Telegraph:

As for the US, we may soon be looking at an era when gas, wind and solar power, combined with a smarter grid and a switch to electric cars returns the country to near energy self-sufficiency.

This has currency implications. If you strip out the energy deficit, America's vaulting savings rate may soon bring the current account back into surplus – and that is going to come at somebody else's expense, chiefly Japan, Germany and, up to a point, China.

Shale gas is undoubtedly messy. Millions of gallons of water mixed with sand, hydrochloric acid and toxic chemicals are blasted at rocks. This is supposed to happen below the water basins but accidents have been common. Pennsylvania's eco-police have shut down a Cabot Oil & Gas operation after 8,000 gallons of chemicals spilled into a stream.

Nor is it exactly green. Natural gas has much lower CO2 emissions than coal, even from shale – which is why the Sierra Club is backing it as the lesser of evils against "clean coal" (not yet a reality). The US Federal Energy Regulatory Commission said America may not need any new coal or nuclear plants "ever" again.

Trying to unravel all the geopolitical implications of a world drowning in natural gas makes my head spin. What this will mean for Pittsburgh is staggering to contemplate. It is also good news for the Mahoning Valley where steel tubes used in the natural gas industry are produced. V&M Star is poised to invest $1 billion into its Youngstown plant.

The natural gas infrastructure, including industry innovation, could be manufactured primarily within the Tech Belt. An energy boom seems imminent with or without the right price point in the market. The driver will be the popularity of American energy independence. I'm confident in this geopolitical shift given the Russian posturing:

Texas A&M University said US methods could increase global gas reserves by nine times to 16,000 TCF (trillion cubic feet). Almost a quarter is in China but it may lack the water resources to harness the technology given the depletion of the North China water basin.

Needless to say, the Kremlin is irked. "There's a lot of myths about shale production," said Gazprom's Alexander Medvedev.

If the new forecasts are accurate, Gazprom is not going to be the perennial cash cow funding Russia's great power resurgence. Russia's budget may be in structural deficit.

We live in interesting times.

1 comment:

Mark Arsenal said...

Ah, you cornucopian economists. A couple of reactions from someone who obsesses over this topic on a daily basis:

The jury's still out on just how 'cheap' the new gas sources are. It's easy to declare energy shortages over when we're in a deflationary demand trough. I honestly don't see people calling this stuff 'cheap' if we return to sustained 2007-level global growth.

Then there's the fact that this is still a sequestered hydrocarbon that we intend to release into the biosphere. Bye bye Maldives.

There's also the fact that none of these alternatives give us something matching Diesel's ability to power our resource extraction industries (biodiesel gums up at low temps and is not nearly as efficient per gallon). None of these alternatives are an answer for commercial or military aviation.

Finally, the EROEI on every single alternative actively entering the market (including all these 'cheap' new gas sources, which at proposed prices would have been laughably expensive a mere decade ago) is drastically lower than even the non-conventional oils coming out of Canada and Venezuela.

Even if we manage the minor miracle of cobbling together a distribution network and the consumer technology to use these as a replacement for our current infrastructure before conventional oil demand exceeds supply, we will still have to learn to work harder than we used to for every BTU we need. Demand edged over supply for just a few days in April 2008, causing widespread global disruptions for months. When the economy - especially China, India and Russia - get steaming back to 2007 levels again, there is likely to be a much longer period of supply-demand inversion.

I'm still putting my bets on resource Armageddon ahead of technological messiah for the coming decade...