Health Care v. Energy

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WASHINGTON – What’s the correlation between the vast shale gas deposits in Texas, West Virginia, Ohio, Pennsylvania and New York state, (with more in Quebec, Canada) and the ever more complex and politically laden health care (more appropriately renamed by some “health insurance”) reform package, about to be fought over in what appears to be a decisive Washington congressional battle? Well, on the surface, none whatsoever. In practice, though, there is a huge “either or” connection, in as much as the intense focus on health care prevented the Obama administration and Congress to do much else, including crafting appropriate and badly needed policy guidance that could give impetus to the exploitation of abundant, domestic natural gas energy resources –resources that could get us much farther along in our process of changing the basic energy components that will propel the US economy into the future. As “we are doing health”, we “cannot do energy”. And this is not good news, as energy is our future.

The new natural gas picture

Just think of this: very recent technological refinements would allow the large scale exploitation of vast natural gas resources, known to exist for a long time; but until recently deemed to be too difficult to extract and thus uneconomical. These deposits, such as the Marcellus field stretching from West Virginia to Pennsylvania and New York add significantly to our proven gas reserves. The combined total reserves could last 100 years at current levels of consumption. This is not a marginal discovery that just adds a bit here and there. This is huge.

Energy policies are needed

This new gas reserves picture means that we have a lot more than we thought. This has to change significantly our plans, strategies and the direction of massive energy investment flows for the next 10 or 20 years. And indeed there is already a flurry of exploration aimed at bringing these deposits to fruition. But, without clear long term policy guidance and without an agreed upon energy strategy, many potential players have adopted a rather cautious attitude, delaying investment decisions and thus the development of new resources that could truly modify the energy outlook for the US for many years.

No coherent plan, smaller investments flow

Investors need to know what the environmental constraints are and will be as they employ new and in some instances potentially damaging techniques that include pumping water into wells that may mix with minerals and later on damage the soil. Furthermore, investors need to have a better idea of what the future price of carbon based electricity and fuel will be. Are they going to be taxed heavily in order to reduce the amount of carbon we consume? Are we going to look at gas more favorably as a transportation fuel since it pollutes less than gasoline, not to mention that it will be produced at home, and not imported at a high cost? What about incentives and or tax brakes that could hasten the pace of exploration thus bringing this new source of fuel to market sooner rather than later?

No policy: inevitable delays

Many of these issues need to be looked at comprehensively, in order to shape some kind of strategic energy outlook for America. And such a plan would help those who are sitting on the fence right now, trying to divine which way policy would go so that they will tailor their investments accordingly. This being the case, the more we delay our national efforts aimed at creating a comprehensive policy framework, the more we shall delay the exploitation of a significant domestic resource that woud create new options at least for the short and medium term, allowing more time to develop truly game changing alternatives that most probably will be based entirely on renewable non carbon based sources of energy.

Simply stated, the aggressive development of abundant domestic natural gas could alter the mix of investment in future electrical power generation, while it could also significantly reduce the amount of oil America imports, assuming that overtime we could switch from gasoline to natural gas for a sizable segment of our more than 247 million vehicles.

Washington cannot handle more than one big issue at a time

But Washington can only deal with so many large policy issues at any given time. Hugely controversial health care has been and still is front and center. It absorbed most of the focus, energies and time of the administration and of the Congress for more than one year. As a consequence, not much room left for other key strategic issues, such as America’s energy future –an issue that in more fortunate times would deservedly get top priority status. But the hard fact in Washington is that If we do health, we do not do energy.

Energy should be a priority

Ordinarily, most would agree that the make up of energy supply sources in America is a key strategic and economic issue, as the US is the highest per capita energy consumer in the world, currently importing more than 65% of its oil from foreign sources, at the tune of more than 260 billion dollars per year, an amount that is larger than the much demonized US trade deficit with China.

So, in normal circumstances, the awareness that new technologies, first experimented in Texas, based on horizontal drilling and the injection of water in wells so that the pressure may free up huge natural gas deposits making them economically exploitable would be a sensation, as this means that we have the opportunity to look at our natural gas deposits as a much bigger component of our energy mix for quite a long time.

Shale gas news get little attention

But now, while newsworthy, and certainly talked about, this development does not get the attention it would deserve, as the policy and regulatory environment that could expedite or delay investments in this strategic domestic resource has not been properly clarified. While new policy guidance is by no means the only issue that would drive investments, quite clearly it is a key component.

Key issues need to be resolved soon

Among key concerns, as indicated in a special section produced by IHS CERA specialists published as a supplement in The Wall Street Journal of March 10, 2010, if we assume that natural gas could be used for additional electrical power generation, decisions on whether to invest or not would largely depend on expectations of how carbon based fuels will be regulated 10 or 20 years from now. Large scale power generation plants have a long life span. Today’s prices and rates are of some interest. But what motivates huge investments is expected profitability over decades. Hence the need for policy clarity that will shed light on what can be reasonably expected going forward.

Gas and wind

Furthermore, depending on what we expect to be the mix of future electrical power generation, it would appear that natural gas generation would be ideally suited as a back-up for electricity producing wind farms, whose output is affected by wind variability. Little wind, little electricity, so there is a need for back up generation, and this could be obtained through gas fired plants. If we imagine a scenario in which we really embrace wind as a renewable source on a massive scale, then the potential use of gas as back up for wind farms also grows.

Gas as transportation fuel

And then there is the vast potential utilization of natural gas as a transportation fuel, with clear advantages for our balance of payments, as this gas supply is domestic. This switch would also improve our national security, since it would diminish our chronic and growing dependence on foreign oil supply. Finally it would be more environmentally friendly, because natural gas generates lower amounts of emissions compared to gasoline.

Switching to natural gas as transportation fuel will not be easy. We would need to create, practically from scratch, a whole new national network of filling stations and the supply system that would restock them. One way to get started on this would be by switching to natural gas large fleets of vehicles that usually rely on a centralized refueling system. This would create reliable demand, while it could provide the basis for a larger gas distribution network.

Gas and electric cars

But we also have to take into account that, moving forward, natural gas would have to compete with more gasoline efficient vehicles and later on, assuming adequate progress in the technology, with vehicles powered by electric batteries. And this opens up the debate as to whether it would be more efficient to use our gas as fuel for cars, or as fuel for the electrical power necessary to refill the batteries of electrical vehicles, as indicated in the IHS CERA report referred to above.

Vexing issues but little policy guidance

All these are important questions and experts should debate the cost-effectiveness of different mixes. But one thing is clear, without a clear policy and regulatory regime that would determine the shape of the landscape not just for today but may years down the road, we shall be stuck with a murky regime that will delay decisions about huge investments that could significantly improve the make up of US energy supply.

We could gain time by exploiting our gas

The possible exploitation of these vast natural gas reserves does not create an entirely new long term strategy, as this gas, however abundant, is eventually finite, while electricity demand is projected to grow significantly, thus requiring more and more supply. So, long term, it is obvious that renewable energy sources will have to play a bigger and bigger role. But we have a very long road ahead before cheap, renewable energy supply will be deployed on a massive scale. In this context of incremental changes, the newly developed ability to successfully exploit huge reserves of domestically based natural gas should be regarded as great news. It is abundant and it is right here, at home, much of it located in the proximity of tens of millions of consumers and large scale end users.

Washington reality: we do health, we do not do energy

But Washington can only chew so much. The Obama administration strategic choice to make health care the signature issue of the first year of this administration means that for this President social issues are more important than actions aimed at strengthening the basis of our economy. Whatever the eventual fate of the health care package, it is clear that we have done very little on energy issues for more than one year, because the health issue has taken all the space. Only time will tell whether this choice of strategic priorities was wise or not.

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