Friday, August 31, 2012

Wishful thinking on natural gas prices

Rod Adams of Atomic Insights has posted a string of arguments in the general thread that natural gas prices are set to explode - or at least, precipitously increase - and that further, the current historic lows in natural gas prices are a mirage, one carefully put into place by gas producers to squeeze out competition, particularly in the electricity sector. In his latest post, "Where is the huge increase in US natural gas supply?" Rod points to EIA data indicating that the "flood" of new natural gas is anything but.

There's just a small problem in this assertion - the data doesn't support Rod's claims. And I say this as someone who obviously would like this to be true. Low natural gas prices have largely put the brakes on new nuclear construction - the latest casualty being Exelon's planned Victoria unit in Texas. Obviously, Exelon has made its position known on whether it will be investing in new nuclear units in an environment where natural gas is currently cheap (it won't), so this comes as a surprise to no one. In fact, the overwhelming majority of new electric generation capacity in the U.S. over the last decade has been natural gas.

Rod makes the claim that the cause of currently low natural gas prices is less due to new supply and more due to slumping demand for energy given the recession. As evidence of this, he points to this chart from the EIA, indicating gross withdrawals of natural gas at U.S. wells.

Rod's argument is that the new supply hitting the market isn't exactly overwhelming - and therefore, when demand picks up, so will prices. The data Rod is using to justify this reasoning is withdrawals at the wellhead - which indicates how much supply is hitting the market. The trend is easier to see on the annual withdrawals basis.

While we don't see an "explosion" in terms of orders of magnitude difference, looking at the data, it's clear that natural gas withdrawals have increased by over 20% since 2005 - hardly insignificant.

But frankly, this is the wrong metric to look at the begin with. If we want to know the real story with natural gas supply, we need to look at proven reserves (i.e., the amount of natural gas we have reasonable certainty of economical recovery from the ground). Again, going to the EIA data, we see the same trend; since 2003, proven U.S. reserves have increased from about 7.5 billion barrels to 9.3 billion in 2011 - a 24% increase. Again, while not mind-blowing, this is not insignificant.

However, we're still missing one last piece of the puzzle - natural gas consumption. This of course is the key to Rod's argument - we've demonstrated that supply has increased, although perhaps not "exploded." But Rod claims that much of what has contributed to temporarily low gas prices has been slumping demand due to a down economy. We can easily evaluate this claim by looking at total consumption data.

On a month-by-month basis, peak consumption (in January) did decline from 2011 to 2012 - by about 5%. This may be partly due to a sluggish economy, but probably more so due to an anomalously warm winter. To get a better feel for total consumption trends however, one should look at the annualized data, "smoothing out" some of these peaks.

On an annual basis, natural gas consumption has been rising - since 2003, net consumption has increased by about 10%. Looking at just the last six years (from a minimum in 2006), gas consumption has grown at a maximum of about 14%.

So now to recap - natural gas supply, in terms of proven reserves, has increased by about 24%, while natural gas consumption has only grown by 14%. Basic economics allows one to predict what happens to price under this circumstance - supply has, in the short-term, outstripped demand. However, while demand has dropped off a little in 2012, supply has been outstripping demand for the last 10 years - this is not a temporary phenomenon.

Now, one can make the argument that eventually demand will catch up with supply - in which case, prices certainly will begin to creep back up. But there is no evidence that proven reserves themselves are declining, which means predictions of the imminent explosion of natural gas prices have, unfortunately for nuclear, little basis in reality.

This gets me back to a recurring point I make many, many times - for nuclear to be viable, reducing capital costs and eliminating the risk premium must be the absolute first priority. (A second, equally important priority would be in establishing a clear price signal on carbon dioxide - very much contrary to the giveaway to natural gas producers which the EPA's current target amounts to.

Expecting a deus ex machina spike in natural gas prices to save new nuclear construction simply isn't going to happen in the short-run. It may be true in the long-run - a decade or more away. And certainly any utility looking to hedge against future price volatility in fuels would be smart to invest in nuclear. But there isn't any evidence that a sudden increase in gas prices will come to nuclear's rescue in the near-term, and this is important - not because I don't want to see new nuclear get built, but because nuclear advocates need to be clear-eyed about the reality confronting them. Self-deluding arguments might feel good in the short-run, but they do little to see to it that new nuclear plants actually get built.

Update: In the spirit of Bryan Caplan of Econlog, Rod has made a wager ($50) with me; that there will be at least one month by end of 2014 in which natural gas prices at Henry Hub will exceed $10/MMBtu (Rod is betting that they will exceed this). I have to say, I respect anyone willing to put their money where their mouth is. I hope I'm wrong, but I doubt I will be.

For reference, here's the historical EIA data on natural gas prices. (For clarification: 1 MMBtu = 1000 Btu; 1000 cubic feet of natural gas contains about 1020 Btu, or 1.02 MMBtu)

Tuesday, August 21, 2012

Rolling Over the Odometer

We just got our 100,000th pageview today.
Neutron Economy hits 100K

It's been a wild ride over the last year and a half, where this blog began with a baptism by fire in the early days of the Fukushima crisis with our first post, "Fukushima in Layman's Terms", where our first and foremost goal was to attempt to as much as possible distill the events in Japan accurately in a way the general public could understand. I'd like to believe we've made some impact on that goal - and at the very least, we're doing something right.

Thank you to all of our loyal readers!

Monday, August 20, 2012

Cultural signaling and energy

An image that struck me recently and has stayed with me since was a license plate. Specifically, a jet-black Kentucky license plate, emblazoned "Friends of Coal."

KY friends of coal license plate
The first thing that ran through my mind was, "Who in their right mind proudly trumpets supporting that?" It struck me as about the same contrarian attitude as waving around a Confederate flag (or its more common contemporary, sporting a Confederate flag bumper sticker; which again, some people actually do that). These are things that, to an uninitiated Midwestern exile like myself, should seem embarrassing to display, to say the least.

Yet, oddly enough, much like the confederate flag paraphernalia one encounters with depressing frequency south of the Mason-Dixon line, Kentucky's "Friends of Coal" license plate is the state's most popular custom license plate design - more popular than veteran's plates and those supporting the University of Kentucky. As it turns out, several other states in the area have their own variations, including Virginia and West Virginia.

Obviously, coal is a major economic player in Appalachia, so strong support is to be expected. But the image in my mind started making me think about a broader issue in energy politics, and perhaps why it seems why so often it seems like there are two sides talking past one another (where, incidentally, nuclear tends to be neglected in the crossfire). Specifically, a part of me wonders if what one sees in trends of public support for various energy sources has to do with the economic phenomenon of "signaling" behavior.

I've of course speculated about how cultural perceptions might play a role in public opinion over energy sources numerous times before, but what struck me here was whether support for energy sources - and specifically, some of the most stark divides that manifest - are perhaps deeper expressions of the cultural and aspirational values of the proponents, trumping factors including economics and environmental considerations (as well as basic issues of numeracy).

To back up a bit - in economics parlance, "signaling" is usually used as a way which people convey information which can't always be directly inferred or observed. Signaling can exist both in the banal, uncontroversial sense - wearing a suit and tie signals conformity, particular conformity to societal expectations of professional behavior - to somewhat more contested areas (such as whether higher education acts as a signal to employers as to characteristics including intelligence, diligence, or again, conformity).

Thus, my hypothesis - I am left to wonder if strong, highly polarized opinions on energy sources - particularly on divides such as coal (and to a lesser degree, natural gas) as well as wind and solar don't perhaps serve as signaling "stand-ins" for statements of individual values and cultural affinity.

In particular, the coal industry has capitalized on this in a particularly effective way, with their "America's power" re-branding, and in particular attempting to link coal exclusively to the idea of low-cost, reliable energy generation (again, despite the fact that the levelized costs of nuclear, with its capital costs folded in, are not wildly out of line with coal, particularly if carbon capture and sequestration is a mandated component.) Coal is, in effect, a signal of working-class values, and in particular an expression of solidarity with the working-class communities typically associated with coal-mining.

In a less regionally confined sense, one has to wonder whether some of the pushback from the right over President Obama's "War on Fossil Fuels" also has more to do with outward expressions of cultural affiliation than it does practical concerns over energy. (Nevermind that favoring one fossil source over another hardly consistutes a "war" on fossil fuels). Consider if you will how often right-wing pundits complain about how curtailing fossil fuel use for electricity would spike energy prices - again, as if nuclear energy weren't supplying a fifth of our electricity at the lowest marginal cost of baseload production next to hydro.

I can't help but feel like the effect is intentional - although perhaps not for the reasons folks like Rod Adams might assert (i.e., no, this is not a fossil-fueled conspiracy). Instead, look to the numbers - while support for nuclear energy is strong among self-identified Republicans, it trails far behind support for exploration of new fossil sources. Ultimately, one has to wonder if such public rending of garments pertains more to a cultural push-back response - rallying around fossil sources because of perceptions of the other - and less about actual, considered evaluation of economic and environmental trade-offs of different energy sources.

Contrast this with renewables - support for renewables is much like recycling - a token expression of environmental concern which can be done for minimal required effort. It is, in essence, expressing support for the environment without actually requiring any kind of substantial commitment from the individual. Considerations such as reliability of supply, economics, or even sheer scale are immaterial - support for renewables is, in essence, "green cred." Among the more radicalized, the inherent limitations of renewables are even considered a feature, not a bug - the limited capacity and availability of renewables are an exhortation to consume less, and ultimately to de-industrialize. In either case, support for renewables is less about the practical reality of the enormous challenge in powering an industrial society at the whims of nature and more about the value expression (or, as it were, aspiration) that it entails.

This process playing out prominently on the campaign trail right now. In Iowa, President Obama blasted Mitt Romney for his support of allowing a wind power production tax credit to expire. Meanwhile, Mitt Romney and his supporters have been slugging back, contending that Obama has been waging a "war on coal." (Note as well the targeted blue-collar audience.)

One can easily see where this one is going. Orphaned from any such discussions is nuclear; something at least now (mercifully) given tepid support by both sides, if only because excluding nuclear from energy discussions on the grounds of both environmental and economics grounds is inherently a politically self-marginalizing position, even if it doesn't seem to command strong feelings among most.

So what does support for nuclear energy signal, if you will (and likewise, its opposition)? I would hypothesize that the dividing line for nuclear turns on issues of technological optimism and energy abundance. A common thread I have observed among many nuclear professionals and advocates is a belief that the technology can consistently be made cheaper, more abundant, and ever safer. In particular among these people - myself included - is a belief in the imperative of energy abundance (this in fact was part of the reason I became a nuclear engineer). By contrast, nuclear opponents are frequently (although not always) in the opposite role - sometimes technological pessimists and with a shocking frequency advocates of energy austerity - believing that the answer always is to consume less (despite the unmistakable positive correlations between prosperity and energy consumption, namely due to what energy enables us to do in modern society).

I remark that nuclear opponents are not always technological pessimists, namely because one occasionally encounters the odd nuclear opponent with delusional beliefs about the capability of renewables - although almost universally they fall back to the position of energy austerity when the limitations of renewable sources are brought up.

What do you think? Is energy advocacy a marker for more deeply-held cultural values? And if so, what does a strong preference for nuclear indicate?

Aside: On a personal note, I hope to be back to more regular blogging soon; this month I started out as a new faculty in the Nuclear Engineering department at the University of Tennessee, and suffice to say, the life of a new faculty can at times be... overwhelming.