Bad Regulations, Outdated Systems Neutralize The Advantages Of Cheap US Energy – Power Outages in Texas?

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By Paolo von Schirach

June 5, 2012

WASHINGTON – There is no question that the shale gas revolution is an extraordinarily positive economic development for the entire American economy. Cheap and abundant domestic energy is a real tonic for a battered system. There is no doubt that its ripple effects will become more significant as more sectors –from the plastic industry to fuel for heavy trucks– will be positively affected in the years to come. That said, it would appear that rock bottom prices cannot counter balance negative currents, right in the middle of some gas producing regions.

Pittsburgh has lots of natural gas

Take Pittsburgh, in Western Pennsylvania. The city, once upon a time the center of the US steel industry, today is right in the middle of the Marcellus shale, that is to say at the very center of the shale gas revolution. Beyond power generation, natural gas can be used as transportation fuel and it is particularly cost effective for large trucks and buses, that is vehicles that are used a lot and consume a great deal of fuel.

For this reasons, I would have thought that Pittsburgh would be first in line to have the best public transportation system in America based on super efficient buses powered by its very own, locally produced, natural gas. Well, it turns out instead that the Pittsburgh Port Authority is semi-bankrupt and that it is planning dramatic service cuts in order to stop the bleeding.

Public transportation in crisis

A story on this crisis in the WSJ makes no mention of natural gas powered buses. It describes instead huge legacy costs and high medical insurance burdens for employees and retirees that stress the Authority’s budgets.

Without getting into all the details of who subsidizes what and by how much, one thing is clear. While the cheapest transportation fuel in the Western world should be a major advantage for the Pittsburgh bus system, apparently this is not nearly enough. Other factors weigh so heavily on the total costs for the bus system that the cheap fuel advantage becomes irrelevant.

This is truly worrisome. This means that in America we have developed an almost uncanny ability to mismanage public services so that they become unaffordable, even when some basic operating costs –fuel in this case– could be dramatically reduced.

Power cuts in Texas?

Change state and sector; but a similar issue. Texas is also an energy rich state with lots of new gas. Well, guess what: Texas will soon experience power outages because of lack of new power plants. On the face of it, this is totally counter intuitive. You would think that cheap gas would make it easy to supply more energy to more people at a lower cost. Well, not so.

The maddeningly complicated maze of regulations and rates settings for utilities conspire to obtain the opposite effect. It turns out that in the current scenario shaped by very low rates it is not profitable to build new power plants. If rates could be increased (a lot) then the utilities could see profits down the line and would build more generation capacity. But now they do not, and so Texas risks power cuts.

This is totally absurd. I know very well the predicament of poor countries in which energy is scarce because it is prohibitively expensive. But projected power outages in Texas? Right in the middle of a a historic natural gas revolution, with super abundant supplies of cheap energy?

Just like in the case of Pittsburgh forced to cut bus services, here we see the effects of counter productive regulations and arrangements that end up neutralizing even the impact of what should be unquestionably good news for the economy and for the general population.

Natural resources matter, enlightened public policies matter even more

The lesson here is that natural resources matter –a lot. But stupid regulations, outdated union contracts, complicated administrative rules and assorted anti-economic customs matter even more. Think of this: Taiwan and Singapore have zero natural resources, and yet they prosper simply because of enlightened governments that do think about prosperity and do what they can to promote it, not hinder it.

Viceversa, here in America we seem singlemindedly devoted to nullify even the advantages that geology and the ingenuity of the energy industry brought to us. This is disheartening.

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