Thursday, January 13, 2022

The New Energy "Crisis"

About a year ago, I wrote that activists were dancing on the grave of the petroleum industry. Prices were so depressed that drilling had all but ceased. Smaller companies that specialized in fracking had gone belly up in job lots. Crude oil tankers were idling off the California coast because they couldn’t unload their cargos, in the same way container ships are today. I also said that it's not dead yet.

Over the last few months, the price of crude oil has gone up by 106%, natural gas by 58%, gasoline by 56%, and coal by 35%.

Ouch. Why is this happening?

There are many factors at play which will plague the energy markets for quite a while. It’s pretty much another Covid-inspired supply chain problem, seasoned with geopolitics, sprinkled with poor planning (of course), and leavened by bad weather worldwide.

Fossil fuels are commodities traded on the futures market. Prices shift based on expectations, and currently, markets expect that supply will outstrip demand for quite a while, perhaps another year, I suspect.

The petroleum industry is not dead, but it’s not running sprints either. It takes time to bring back idled drilling rigs and hook up wells to the infrastructure needed to bring oil and gas to market. Category 4 hurricanes which shut down oil and gas production in the Gulf of Mexico don’t help either.

Robinson Meyer of The Atlantic points out that natural gas has become the go-to fuel of choice. Over the last decade, countries integrated natural gas into the world’s energy system because it was cheap, reliable, and plentiful. Today, gas is none of these things because everyone wants it and wants it NOW.

First, Meyer observes that liquified natural gas (LNG) is now shipped around the world, so gas markets are not limited by pipeline transport and distribution systems. LNG is treated as a tradable commodity just like crude oil. As their economies recover, Europe and Asia are competing for the same limited supplies currently on LNG tankers, driving prices up.

 Russia is also making trouble by limiting the amount of gas it sends to Europe through its pipelines as part of its foreign policy.

Second, coal is still the king of power production throughout the world, but coal markets are as screwed up as other energy commodities. Bloomberg estimates that US coal production has dropped by 40% over the last six years due to the continued shift to natural gas. According to Reuters, China cannot get enough coal to run its power plants and is instituting blackouts. A trade dispute with Australia shut down that source. China is now buying coal from Europe and South Asia, which means those regions don’t have enough for their own needs.


Third, Meyers says that oil, the main transportation fuel, is also an alternative fuel for power plants. For some reason, like making more money, OPEC decided that maybe it’s not going to open its spigots as fast as needed to meet the rising demand, something it could do quite easily.

Fareed Zakaria, in a recent Washington Post column, discussed another problem contributing to this situation. Investment in fossil fuels has plummeted. Investment funds, large pension systems, and endowments have mostly turned away from them for environmental reasons or because they are a bad bet in the long run. As I wrote a year ago, even oil companies are writing off reserves. Existing Federal leases are either unused or have no takers. It’s hard to drill when no one will finance you.

Zakaria observed that at the moment there is nothing to fill the void left by a fossil-fuel energy sector disrupted by the pandemic and long-term investment decline. Grid-scale wind and solar energy are experiencing exponentially rapid growth. They contribute 12% of US annual energy production according to the US Energy Information Agency, but it’s not near enough right now. Zakaria wrote that “it would require a 2,500 percent increase in production and deployment to have wind and solar fully replace fossil fuels [worldwide], which is not going to happen in the next few years.”

 In my opinion, nuclear power cannot fill the gap either. The industry has been stagnant for decades. The years-long lead times to build very complex plants which have historically been uneconomic make it a poor choice.

 Natural gas has long been considered a transitional fuel because it’s much cleaner in all aspects than coal. The problem is that we never seriously started the transition away from gas to green energy. In the US, we’ve been patting ourselves on the back because we reduced our national carbon footprint by switching from coal to gas. How’s that working out for us today?

Winston Churchill said “Never let a good crisis go to waste”. Now that an energy shortage has put us in a bind, perhaps we can hurry the transition along?

Alternative energy technologies cannot fill the void caused by this particular extraordinary and rapid convergence of events, but so what?

With high energy prices, now is the time to invest in scaling up alternative energy, making our electric distribution grids better at getting generated energy from source to consumer, as well as storing it. We have the technology. An analysis by the Lawrence Berkeley National Laboratory estimates that this transition could be accomplished within a couple of decades in an affordable manner. It’s engineering, not wishful thinking.

This “energy crisis” is a crisis of poor planning and risk management on all levels. It’s also an opportunity. We probably won’t, but we could take advantage of it if we wanted to. 

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