Tuesday, April 08, 2008

Conservation versus outsourcing

Read "The Wonderful Curse of Natural Gas Price Volatility". It's short, just 12 pages long.

Check out the graph at the top of page 9: "U.S. Industrial Gas Demand Destruction". That's a 22% drop in industrial natural gas utilization between 1997 and 2006. That's not efficiency, that's offshoring! What's going on here?
  • Natural gas is a feedstock for the fertilizer, chemical, and plastics industries, and a fuel for the electric generation industry.
  • Electric power generators are less sensitive to the price of their fuel than fertilizer, ethanol, and plastics, since the latter three can all be shipped to us oversea, and electricity cannot.
  • The electric generation industry is sensitive to the capital necessary to build capacity, because the rent on the capital to build their plants has to be priced into the electricity sold, and different plants do compete to produce and sell electricity. Thus, more capital-intensive plants are more likely to have lower return on investment if electricity prices dip.
  • Gas turbine power plants have exceptionally low capital costs, making them very desirable to the power producers, and gas prices were low during the 1980s and 90s.
  • So, electric generators built 200 gigawatts of gas turbine powerplants during the 1990s and early 00s, so that gas turbine plants now constitude 41% of our nameplate capacity (EIA figures). These gas turbine plants are now running at a capacity factor of 21%, and produce 20% of our domestic power (once again, EIA).
  • Figure 7 of page 8 of the Ventyx report shows that between 1997 and 2006, gas consumption by the power generators rose from 11 to 17 billion cubic feet a day. That's all those gas turbines coming on line.
  • It turns out there is a limited supply of domestic natural gas. Demand rose, supply stayed constant, and thus prices rose.
  • Over the same time, industrial consumption dropped from 23 to 18 billion cubic feet a day. That's domestic fertilizer, chemical, and plastics production being moved overseas in response to higher feedstock costs.
  • U.S. consumption of fertilizer, chemicals, and plastics has not dropped, and conversion from the feedstock to the final product increases value, so offshoring has driven the jobs overseas and also increased our trade deficit by much more than the cost of the natural gas consumed by the electric generation industry.
What we have here is another example of a strong negative correlation between the performance of the U.S. power generation industry and the U.S. economy as a whole. This is a tragedy, partially responsible for our $708 billion dollar/year trade deficit. That's an unpaid $2360 bill, per man, woman, and child, per year, for everyone in the United States.

This post and the last one may lead some of you to think I'm all for a command economy. No. I'm pretty sure that if we nationalized the electric power generation industry, we'd end up running it less efficiently, which would also lead to higher domestic power costs. I do think we need to bring the measure of performance of the electric power generation industry into better alignment with the domestic economy.

The domestic economy does well with cheap energy. In this context, gas turbines are a disaster, since they redirect a feedstock away from high-value-added uses (plastics) into low-value-added uses (electric generation). We have readily available substitutes for electric generation (coal and nuclear), but not natural gas. In some sense, all a gas turbine does is convert one kind of energy into another without increasing the domestic supply.

I don't know how to make domestic power producers profit more when the US economy has cheaper energy. The benefit of marginally cheaper power is probably nonlinear, and possibly unmeasureable in any way that would allow accountants to calculate a credit to power producers. I do not want to see more coal powerplants, because of the currently externalized cost of CO2 production, even though they are a cheap source of power. Perhaps the simplest way forward is what we have now: tax credits or subsidies for the obvious answers, like wind and nuclear, and just feel our way through, year by year, guessing which subsidies will distort the electricity market to best serve the interests of our citizens.

I'm sorry to keep harping on this energy and trade stuff, but to be honest, I'm scared. I don't understand how to predict what this trade deficit will do, nor do I understand how big is too big, but $700 billion feels too big. Our trade deficit, national budget deficit, credit crisis, housing market meltdown, and war in Iraq give me the feeling that this nation has derailed and is about to make a very expensive and possibly bloody mess.

The last time we got into a World War, we had just splurged on national infrastructure. Think about this: 90% of the Allied aluminum flying over Germany was made with power from the Grand Coulee Dam, built from 1933 to 1942, i.e. just in time. I'm not saying I expect another World War, but I am saying that when times get tough it's good to have serious infrastructure in your back pocket.