Guest Editorial: The Myth of Increasing Gas Consumption

by Rich Ferguson Center for Energy Efficiency and Renewable Technology Research Director My computer accesses the Internet via satellite and can download statistics from the U.S. Energy Information Administration (EIA) in seconds. Their very user-friendly ?natural gas navigator? tells me how much gas has been consumed in the U.S. during the last seven years with just a few mouse clicks. A few more clicks and my computer draws a graph that tells me that consumption of natural gas has, on average, been declining since 1997. Consumption in 2003 was the lowest in seven years. Despite easy access to information, the media (even publications that should know better) continue to insist that U.S. consumption of natural gas is growing. Obviously, it is not. So much for the wonders of the ?Information Age.? There isn?t enough gas being produced in North America for consumption to grow, even at prices nearly three times those of the 1990s. Lots of wells are being drilled, but with minimal results. Twenty-five percent more wells were drilled in the U.S. last year than in the year before, but production rose less than 1 percent. In Canada, from which the U.S. receives about 15 percent of its gas, results were even more dismal?production dropped 3 percent. Canadian exports to the U.S. dropped 16 percent. If it weren?t for the 507 billion cubic feet of liquefied natural gas (LNG) imported last year, U.S. gas markets would be in a world of hurt. Apparently, the media have been overawed by the large amount of gas-fired generating capacity coming on line in recent years. According to EIA, this capacity increased from 74 GW in 1999 to 171 GW in 2002, an increase of 131 percent, which sounds like a lot. Pundits apparently assumed that consumption of gas must be increasing accordingly. But EIA also reports that gas used by electric generators increased only by about 15 percent. The impact on U.S. total gas consumption was considerably smaller, since less than 30 percent of U.S. gas is used for electric generation. The reasons for the marked difference between gas-fired capacity and gas consumption in the electric sector are unclear. It seems likely that much of the generation from newer, more efficient power plants replaced generation from older plants. Average gas-fired heat rates decreased from 11,380 Btu/kWh in 2001 to 10,509 Btu/kWh only a year later. Ten percent more power was generated with only 2 percent more gas. Efficiency improvements obviously account for some of the difference. It is also likely that much of the new capacity is underutilized. The Federal Energy Regulatory Commission?s ?Open Access? ruling inspired merchant generators to build new capacity. The thinking was that new combined-cycle plants with low heat rates (and lower fuel costs) could displace older, less efficient generation in competitive wholesale markets. As readers of this publication know well, such competition has been slow to develop. Significant reductions in gas demand would occur if the new efficient generation technology were fully utilized. California faces the same problems as the rest of the U.S.?we?re all relying on natural gas delivered by a single integrated network of pipes. California burns more Canadian gas than most other states do, but prices in California are virtually identical to those used in the New York Mercantile Exchange (NYMEX) commodity market. California?s electricity system also still relies on too many old, inefficient power plants and underutilizes the new ones. But if gas consumed for electric generation is increasing, albeit much more slowly than capacity, and total consumption is decreasing, consumption in other sectors must be decreasing markedly. This is indeed the case, which should not come as a surprise since prices have increased dramatically. After all, most businesses cannot pass fuel costs through to their customers as readily as utilities can. However, consumption in other sectors is complicated by the fact that a large fraction is used for heating and varies from day to day with the weather. And some of the gas-fired electricity is used for summer cooling loads. The Center for Energy Efficiency and Renewable Technologies (CEERT) has developed a computer model to sort out temperature-dependent gas consumption from gas used for manufacturing and other industries that are independent of changes in weather. As expected, the 12-month running average of temperature-independent gas consumption has decreased nearly 10 percent in the last 18 months, cutting overall use by about one trillion cubic feet annually. It seems likely that this ?demand destruction? will be more or less permanent since prices are expected to remain at or above current levels in the foreseeable future. Industries heavily dependent on natural gas as feedstock will find it impossible to compete against manufacturers in countries where gas is still cheap. Many of these countries are tooling up to export LNG to the U.S. and around the world. At current U.S. prices, exporting LNG to the U.S. should be profitable if the source gas is cheap enough. But it doesn?t take a rocket scientist to figure out that using this cheap gas to make fertilizer or whatever, shipping the product to the U.S., and keeping the value added at home makes good business sense. Manufacturers in gas-rich countries pay perhaps one-fifth the U.S. price for gas supplies, an enormous competitive advantage in today?s global marketplace. U.S. manufacturing that is heavily dependent on natural gas will quickly become a thing of the past. While the media are focused on highly controversial LNG receiving terminals, they have missed the fundamental changes that have taken place in North American gas markets since the 1990s. In this short time, the U.S. has arguably become dependent on LNG, in the sense that without it gas prices would be even higher than they are. The half-trillion cubic feet of gas imported as LNG in 2003 kept prices from going through the roof. Without LNG, an additional trillion cubic feet of production and/or demand reductions would have to have occurred since the beginning of 2002. What would prices be today without the LNG imported? Who knows? The problems facing California and North American natural gas markets arise from dwindling supply, not from growing consumption. The cheap gas is gone, and its absence will have serious economic consequences. The state and the nation have two choices?they can become ever more dependent on LNG as they have on imported oil, or they can keep their dollars at home by further reducing demand for gas through investments in efficiency and domestic renewable energy resources. Dr. Ferguson rich@ceert.org is the author of a series of reports on North American natural gas, the latest of which was released this week and is available at www.ceert.org . Editors' note: The views expressed are those of the author and are not necessarily the views of Energy Circuit.

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Guest Editorial: The Myth of Increasing Gas Consumption

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