Answers needed now on natural gas problem

By Ray Kopp, 8/27/2003

GET READY FOR dire predictions about a long, cold -- and expensive -- winter. Already we are being warned of a natural gas shortage of "crisis" proportions. Interior Secretary Gale Norton used that word recently while speaking to the Natural Gas Roundtable in Washington. Federal Reserve Chairman Alan Greenspan -- without using the C word -- also sounded the alarm about rising natural gas prices.

This drumbeat will get louder. The Chinese have a way of writing crisis with two characters -- one stands for danger, the other for opportunity. And, with forecasts about a worsening crisis, we will hear the siren song of policy peddlers who sense the opportunity to sell their pet projects.

So it is that Greenspan is promoting increasing our consumption of liquefied natural gas and Norton is advocating -- again -- additional exploration in new fields offshore and in the intermountain west.

Before we're rushed into an unnecessarily expensive quick fix, though, let's take a minute to consider the situation.

It's true that we have a serious problem -- not a crisis -- with natural gas prices. Natural gas, you might say, has been the victim of its own success. Because of natural gas's attractiveness as an energy source, demand has increased. Unfortunately, supply has not kept pace. As a result, spot market natural gas prices are now in the range of $5 per million BTUs, up from $2.50 in late winter 2002. It seems likely that only very good luck and a mild winter can prevent residential gas customers from experiencing much higher home heating bills this winter. And, because natural gas is a critical ingredient for petrochemicals and other products, the higher prices will be felt elsewhere as well.

None of this is good news for an economy trying to break out of a recession. The solution to the problem, as Greenspan, Norton and others see it, is to increase the supply. No argument there. But how?

Besides increased imports of liquefied natural gas and exploring in new locations, at least two other approaches are being offered. One is increasing use of renewable energy sources, such as wind farms. And the other is exploitation of proven supplies of natural gas from the Yukon Delta by building a pipeline from Alaska to the lower 48.

Each alternative has drawbacks. Exploration has encountered resistance because of potential damage to the environment. Increasing importation of liquefied natural gas requires large capital outlays that are difficult to raise without guarantees of suitable rates of return to investors. That means guaranteeing prices high enough to bring those returns. Additionally, some fear ships carrying liquefied natural gas and storage facilities are potential targets for terrorists.

A pipeline from Alaska would be expensive -- possibly requiring federal price support guarantees to assure investors again of a suitable return on their investment. Additionally, environmental objections will doubtless be raised.

Renewable energy sources like wind farms are promising, but likely can supply only a fraction of the energy needed, especially in the near term.

To the extent that any of these alternatives would require a subsidy or price guarantee -- insurance for investors against the possibility that the price of natural gas might drop -- we have to ask whether we're being asked to fund an expensive long-term solution to what may well turn out to be a short-term problem. If the "crisis" is about high prices because of short supply, why are we worrying about a price drop?

Granting, for the moment and for purposes of argument, that a subsidy or price guarantee might be needed, which one -- or combination -- of the prospects offers the "best" approach? I have no idea, but neither does anyone else. We can't know that until we measure the full cost of each against the benefits that each offers. In addition to the dollar cost of getting the gas out of the ground and delivering it to the consumer, we need to consider at least four other factors: price stability to avoid a market roller coaster, environmental considerations, national security and energy dependence.

We already have some information in hand about some of the approaches. Determining the full cost of each approach may take nine to 18 months. Meanwhile, it's true, we will be paying high prices for natural gas. But what's the alternative? At the earliest, none of the approaches being advocated can make an appreciable addition to the supply problem for two years, probably longer -- too late to have an impact on our present economic malaise.

What sense does it make, though, to buy a policy that offers (relative) short-term benefits if, in the longer run, it entails higher costs than the alternatives?

More sensible, if we need to mitigate the harsher aspects of the current situation, would be to provide assistance to those who can least afford to deal with the higher prices. But before we get stampeded into choosing a solution that could make an expensive problem even costlier, wouldn't it be a good idea to collect some facts, analyze them and make a decision that will be in the long-run best interests of us all? That would be the way to build a foundation for a sensible energy policy.

Ray Kopp is a senior fellow at Resources for the Future, a Washington-based research center analyzing economic, energy, and environmental issues.