Wednesday, July 19, 2006

Our slow-motion energy crisis


David Reinhard

OK, you're concerned about skyrocketing energy prices and you favor all those things we all say we favor when the latest price spikes kick off another round of concern. You favor renewables such as wind and solar. You favor hybrid, hydrogen and electric cars, and more fuel-efficient gas vehicles. Heck, you even favor higher energy prices, because they create the economic conditions for the development of all the above and cause people to conserve in the meantime.

Fine, but can we afford to do nothing to expand today's energy resources—natural gas and oil—while we conserve and develop tomorrow's energy resources? What would be the impact on the U.S. economy? What would be the impact on Americans' jobs and our standard of living? In short, can we be blasé about traditional energy supplies?

Consider the cleanest of our traditional energy sources: natural gas. Unlike oil, natural gas is not a commodity traded in the global marketplace, except for small quantities of liquefied gas. It's traded in local markets. So what we do to produce more natural gas in the United States has a more pronounced impact on U.S. prices than would be the case with oil. It's also an increasingly integrated market, thanks to the construction of major transmission lines. Unlike in the past, natural gas moves from one region to another. So, what's produced or not produced off the coast of Louisiana will affect prices in (the Northwest).

Natural gas prices have doubled for industrial users and small businesses over the past five years nationally, and demand is only going up. The Northwest Gas Association expects demand in the Pacific Northwest to grow 9 percent over next five years.

What happens when there's not enough supply to meet demand?

Let's look at a commodity that's basic to agricultural states: fertilizer. According to the Fertilizer Institute—OK, take a moment to savor the fact that there's actually a Fertilizer Institute—70 percent to 90 percent of the cost of making fertilizer is directly attributable to natural gas. Fertilizer costs have gone up more than 240 percent since 2000.

It's only one of thousands of products that use natural gas as a feed stock. The jump in natural gas prices has sent manufacturers looking far beyond our shores for supply, and that's sent tens of thousands of jobs overseas. The average price of natural gas in the United States was $8.85 per decatherm in 2005. The price was $5.05 in China, $3.10 in India and $6.05 in Japan. It's such price differentials and the resulting job losses that led Democratic Rep. Neil Abercrombie, a former college professor and liberal from Hawaii, to become involved in the issue.

What to do about all this? Oh, maybe take steps to increase U.S. supplies of natural gas.

The House took a good first step on June 29. It passed a bill that would allow exploration and drilling off the coasts of any interested state. For the past 25 years, there's been a moratorium on oil and gas drilling in most U.S. coastal waters. Drilling within 200 miles of the coastline has been prohibited each year since 1981. The bill would make the moratorium on drilling within 50 miles of shore permanent, but give states a say over their own coastlines. A state could extend the drilling ban out to 100 miles or allow drilling within 50 miles of the shore. States would have one year from the law's enactment to decide on natural gas exploration and three years on oil. In addition, states would receive a bigger share of the royalties energy companies now pay to the federal government on the leases.

The House approved the bill, 232-187, with 39 Democrats following Abercrombie's lead and voting to lift the nationwide moratorium.

It's not a perfect bill. It certainly won't be the final bill when the Senate gets done with the issue. Legislation that opens up drilling in portions of the Gulf of Mexico—in essence, legislation that allows and rewards deep-water drilling off states that want it (Louisiana, Mississippi, Texas) and confines the existing moratorium to states that don't (East and West Coast states)—might be both preferable and achievable. But the House bill's bipartisan passage suggests that, at long last, somebody is getting serious about facing our energy supply issues. Let's hope there are enough somebodys in the Senate.

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