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Does the U.S. Really Need An Energy Policy?

Financial Executive Magazine...January/February 2012

     Sen. Joe Mancini (D-W. Va.) was frustrated. Mid-way through a two-hour hearing in the Senate Energy and Natural Resources Committee on November 8, Mancini was taking out his ire on Chris Smith, Deputy Assistant Secretary for Oil and Gas in the DOE Office of Fossil Energy. The hearing was held to discuss whether the Department of Energy should approve applications for U.S. companies to export liquid natural gas (LNG). Just half a decade ago, LNG import terminals were popping up like dandelions in American coastal ports amidst spreading industrial user panic over sky-high domestic prices and disappearing supplies.
     But toward the end of this century's first decade, that gas gloom lifted without warning and  with nary an assist from the U.S. government. Because of an innovative technology called horizontal drilling or fracking, natural gas started flowing from the Marcellus and Barnett shale plays like Champaign from bottles uncorked at the Ritz on New Year's Eve. Gas prices dropped precipitously. The Energy Information Administration (EIA) now estimates the U.S. produces 5 billion cubic feet a day of natural gas more than what consumers can use, with the result that prices have dropped from a high of $12.69 per million BTUs in June 2008 (the average for that year was $8.94) to $3.60 m/BTUs in October 2011.
     Mancini had just asked Smith a question about whether foreign ownership of wells in the Marcellus formation lapping across Pennsylvania and New York could impact the domestic price of natural gas if those foreign owners decided to sell "their" gas overseas. Smith tried to answer. But an impatient Mancini interrupted. "It is shame this country doesn't have an energy policy, that is all I am saying," sputtered Mancini.
    Just half an hour earlier, though, at the very same hearing, from the very same dais, Sen. Lisa Murkowski (R-AK), the top Republican on the panel, had made the opposite point. Naming   Marcellus, Utica, Barnett and other shale plays, she emphasized, "I don't think we should fool ourselves. The government didn't make this happen. The natural gas resource is proving out without any mandate, without any tariff or moratorium, without so much as a tweak in any law or regulation."
     Ever since the Arab oil embargo of 1973, U.S. president after U.S. president has paid at least rhetorical attention to the need for the federal government to develop an energy independence policy. Last March 30, in a speech at Georgetown University, President Obama announced his Blueprint for a Secure Energy Future. He said: "We’ve known about the dangers of our oil dependence for decades.  Richard Nixon talked about freeing ourselves from dependence on foreign oil.  And every President since that time has talked about freeing ourselves from dependence on foreign oil.  Politicians of every stripe have promised energy independence, but that promise has so far gone unmet."
     But it is highly unlikely that Obama's Blueprint will lead to a firmer footing for U.S. energy security than past Blueprints from other presidents, or, perhaps more importantly, whether a Blueprint is even necessary. Obama's Blueprint policy is a loosely knit set of policies which focus on producing more oil at home and reducing dependence on foreign oil by developing cleaner alternative fuels and greater efficiency. The Blueprint is not the result of any particular deep thinking or strategy. The President's Council of Advisors on Science and Technology (PCAST) called for the development of such a strategy in its November 2010 Report to the President on Accelerating the Pace of Change in Energy Technologies Through an Integrated Federal Energy Policy. The PCAST called for a Quadrennial Technology Review (QTR) as the first step in preparing a Quadrennial Energy Review. The DOE completed the QTR in November 2011, six months after Obama published his Blueprint.
     Steven E. Koonin, Under Secretary for Science, DOE, says the QTR is limited in scope and all the DOE felt it could get done given budget and time. "Technology development absent an understanding and shaping of policy and market context in which it gets deployed is not a  productive exercise," he states. At this point there is no indication that the DOE will even undertake the much more important QER, much less complete it any time soon.
      The larger reality is that any energy independence plan proposed by any U.S. President--whether based on a QER or not--has as much a chance of coming to fruition as Washington's hapless Redskins have of getting into the Super Bowl. In any case, the rhetoric of President after President aside, maybe the U.S. doesn't even need an energy independence or energy security policy.
     The biggest energy input for industrial and commercial business users is natural gas. Natural gas prices are incredibly important, both because the fuel is used directly to run industrial processes, heat facilities and commercial buildings, and make products such as fertilizers, pharmaceuticals, plastics and other advanced materials. Thanks to the Shale Revolution, the Energy Information Administration (EIA) forecasts natural gas prices will stay low for the foreseeable future, rising to $4.66 m/BTU in 2015 and $5.05 m/BTU in 2020. That is good news for the owners of 15,000 to 17,000 industrial boilers in this country, most of which use natural gas (and many of those who still use coal are switching to natural gas). In addition, companies such as Dow Chemical are restarting operations at facilities idled during the recession, Bayer is  in talks with companies interested in building new ethane crackers at its two industrial parks in West Virginia, and Chevron Phillips Chemical and LyondellBasell, are considering expanding operations in the U.S.
     Fracking has also had a much less remarked-upon effect on petroleum prices, which are important to businesses with transportation fleets. New oil sources are spurting from the   Bakken and Eagles Ford shale plays.  U.S. oil prices have fallen from $133.88 a barrel of Texas intermediate crude in June 2008 to $86.07 today. The EIA predicts oil prices will rise to $94.58/bbl in 2015 and $108.10/bbl in 2020.
    Beyond the flood of natural gas washing over them, U.S. companies are also benefitting from three decades of investments--most of which made without federal subsidies or support--into facility energy efficiency. Ralph Cavanagh, Co-Director, Energy Program, Natural Resources Defense Council, member of Electricity Advisory Board at the DOE, says the most important single solution for U.S. businesses worried about energy prices and energy access is aggressive energy efficiency. "Energy independence is the wrong issue," he says. "It is reducing the cost of energy services and improving energy security. "U.S. business has done a tremendous job in energy efficiency over the past three decades," he states. "It takes less than one-half of a unit of energy to create $1 of economic value than it did in 1973. Industry has done that by upgrading the efficiency of process equipment and upgrading lighting."
     Others may well argue that the U.S. needs, and has always needed, an energy policy, but one narrowly targeted. Kenneth B Medlock III, PhD, Deputy Director, Energy Forum, James A Baker III Institute for Public Policy at Rice University, notes that the DOE and the Gas Research Institute  helped develop, with federal funding,  the horizontal drilling (i.e. fracking)  technology that Mitchell Energy (now a part of Devon Energy) pioneered.  "Government ought to be focused on research & development," he states. He also is a supporter of loan guarantees to promote investment activity in frontier technologies, and argues that as long as there are more good bets than bad bets in that kind of portfolio, the funds committed in total are a good investment.
     But spectacular failures like Solyndra and other less publicized busts such as Beacon Power's Chapter 11 filing kill the prospect of any additional congressional funding for energy loan guarantees of any kind. That is true even when legislation has bi-partisan support, which is the case for the Energy Savings and Industrial Competitiveness Act of 2011 (S. 1000) which would, among other things, provide grants for a revolving loan program designed to develop energy-saving technologies for industrial and commercial use. The bill passed the Senate Energy Committee by a vote of 18-3 in July. However, the Congressional Budget Office has pegged the cost of the bill's provisions at $1.2 billion over five years. That is a serious barrier to passage. And in any case, even if it did pass, the bill would simply authorize funding. Congressional appropriations committees would have to approve the money as part of the DOE's budget, which would be highly unlikely, Solyndra aside, since similar programs authorized by the 2005 and 2007 energy bills are still begging for appropriations.
        Besides impact on the federal deficit, politics, too, often impede progress on otherwise sensible policies. Politics clogged up the Keystone XL oil pipeline extension from Canada. Environmentalists, a Democratic constituency, oppose the project, arguing it would created more greenhouse gas emissions than necessary and pose a potential drinking water danger for Nebraska residents because it passed over the Ogallala Aquifer, a view held, too, by Nebraska's Republican Governor Dave Heineman, who took the opposite position from all Republican presidential candidates, who supported U.S. approval of Keystone XL.  Labor unions, another key Democratic constituency, support the project which TransCandada, the project sponsor, says will bring more than 118,000 person-years of employment to workers in the states of Montana, South Dakota and Nebraska.
      If the Keystone debate features Democrats v. Democrats and Republicans v. Republicans, efforts to substitute domestic natural gas for foreign petroleum features business v. business. Obama in his Blueprint speech at Georgetown mentioned legislation supported by both Republicans and Democrats called the New Alternative Transportation to Give Americans Solutions Act of 2011 (H.R. 1380), called the NAT GAS Act.  The bill has 180 co-sponsors ranging from Rep. Joe Barton (R-Texas) on the right and Rep. Barbara Lee (D-Calif.) on the left. The bill seeks to provide federal support for a natural gas fueling structure for autos thereby reducing gasoline demand. However, 65 manufacturing and agricultural organizations sent a letter to the House Ways & Means Committee in September opposing the bill, fearing a diversion of natural gas to transportation--even give the 5 b/cu/ft/day overage in supply at the moment--would increase domestic costs of natural gas. Calvin M. Dooley, President & CEO, American Chemistry Council, calls the NAT GAS Act, an "ineffective, inefficient proposal." Supporters of the bill include local and interstate natural gas companies, bus and taxi companies, food companies and the National Beer Wholesalers Association.
      Regardless of whether Americans start driving natural gas fueled vehicles, dependence on Middle Eastern oil for gasoline to fuel autos has dropped dramatically since 1973, without much U.S. government intervention, making the U.S. much more energy secure than ever before. Our number one import source is Canada, from whom we get about twice as much crude oil, according to the EIA, as Saudi Arabia, the number three source, and the only Middle Eastern source besides Iraq in the top 10. Mexico is number two.
     Given the new domestic sources of natural gas and crude oil, important strides in industrial energy efficiency and the shift away from imported Arab oil, the U.S. has made considerable progress toward energy independence or security, whatever term one wants to use, without an "energy policy." That doesn't necessarily mean we don't need a policy. But it does mean that U.S. companies do not have to panic about the absence of one.