Cyclical nature of energy production smacks gas customers

By ERIC PALMER - The Kansas City Star Date: 02/03/01 22:15

Kansas geologist Tim Carr says the record-high natural gas prices that consumers have faced this winter can be largely attributed to the explosion of the computer-based new economy.

It is a circuitous supply-and-demand equation that goes like this:

Increased computer use, including use of the Internet, has added an estimated 10 percent to electric power demand, said Carr, who oversees the petroleum division of the Kansas Geological Survey. Meanwhile, new electric generation is being powered almost entirely by natural gas.

"There are no nuclear, coal or hydroelectric power plants of any consequence being built in the U.S.," said Carr, who testified last week before a Kansas legislative committee. "Natural gas is fueling 98 percent of the new power plants that have come on line during 2000.

"By using natural gas to solve an electric supply problem, we have created a gas supply problem."

Carr and others think fears of a natural gas shortage, which resulted in consumers getting huge heating bills this winter, is part of the boom-and-bust cycle that has always plagued the fossil fuels industry, exacerbated this time by extreme weather. Kansas is the seventh-largest natural gas producer in the nation, with an estimated wellhead value in 2000 of more than $2 billion.

While the process has kicked in to produce more gas and take the pressure off prices, the United States is not out of the woods. The severe price spikes are a symptom of fundamental shifts in the way we produce and use energy.

Carr said the recent spike should serve as a "two-by-four to the head" that the country needs an energy policy.

"Our energy policy is: We want it clean, copious and cheap. But in the last few years, low gas prices really decimated our industry," Carr said. "We have to increase supply, decrease demand and do things more efficiently."

Last week, President Bush announced an energy plan that would allow more drilling for gas and oil on public land, including the Arctic National Wildlife Refuge in Alaska. Bush would permit older electricity-generating plants to run at full pace, even if they violate clean-air standards.

His proposals are expected to meet stiff political opposition from conservation groups.

"We are not opposed to oil and gas development on public lands where appropriate," said Melinda Pierce, a lobbyist with the Sierra Club. "We feel there is plenty of land that could be opened to development without going into sensitive areas like the Arctic National Wildlife Refuge.

"We advocate a comprehensive and diverse energy plan, one that talks about the demand side as well as the supply side. We cannot just drill our way to energy independence, which our man in the White House would do."

To address the immediate shortage, more public land needs to be opened to drilling, said Amy Myers Jaffe, the senior energy analyst at the Baker Institute at Rice University in Houston. But the larger public policy issue, Jaffe said, is that the country needs policies that will lead it to diverse alternatives to fossil fuels.

"The point is not to say, `My heating bill has come down, so I am not going to keep calling my congressman,' " Jaffe said. "We need to take all of this high-tech work we do and all of this education and find energy sources that can meet our needs in a sustainable way. And we need diversity of fuel supplies."

Energy experts say gas and oil prices that tanked in 1998 set the stage for gas shortages and stratospheric prices this winter. Low prices in 1998 kept gas producers from getting the capital to drill new wells.

A couple of mild winters masked the growing threat of a shortage. The problem was exposed this season by an early and harsh winter, which followed a blazing summer and the growing entanglement of gas and electric power generation.

To energy experts, the seed of the problem was planted 15 to 20 years ago, after the energy crisis of the 1970s.

"We went on a building binge and added a bunch of generating capacity in the '60s and '70s," Carr said. "Through the '80s and '90s, we added nothing."

Until recently, the tapering off was not much of a problem.

Energy consumption, which grew dramatically in the 1960s and 1970s, flattened out in the 1980s. U.S. energy use became more efficient, and the economy shifted from an emphasis on manufacturing to an emphasis on services. Indeed, the amount of natural gas used for residential heating last year was less than during 1976, even though the population has increased 23 percent.

What was changing was the amount of electricity we were using.

Electricity use in Kansas, for example, increased 300 percent from 1960 to 1997. Electricity's share of total energy consumed, including gasoline, grew from 15 percent to 33 percent during that period.

In recent years, more of that electricity has been generated by natural gas, as expensive nuclear- and coal-powered electric plants fell out of favor because of their effect on the environment. Coal was a cheaper fuel for generating electricity, but gas was cleaner, and the plants were cheaper and easier to get built.

Even with more gas going to electric generation, there were only a few years in the 1990s in which gas prices were above the $2 per thousand cubic feet level that producers say they need to explore for new reserves.

This past year, one of the problems that set prices soaring was the natural gas storage situation. Traditionally, producers store gas spring through fall when demand and prices are low.

"It is like squirrels sticking away nuts," Carr said.

But with an early and very hot summer, demand for natural gas didn't abate. With a drought affecting some hydropower dams, more gas was used to produce electricity.

Natural gas traders could see there was less gas going into storage and thought winter supplies could get tight if the weather got very cold. When an arctic blast gripped much of the country early and long, and a key gas pipeline broke in New Mexico, traders bid gas prices to record highs.

"People were worried whether we would have enough gas to get through the winter," Carr said.

Utilities such as Missouri Gas Energy in the Kansas City area were especially hard hit. Caught short by cold weather and surging demand, it had to buy additional gas on the high-priced open market.

Those high prices have prompted more production. And gas futures prices have fallen 35 percent in recent weeks, meaning traders now expect there to be enough gas.

But with greater demand this winter on the gas in storage, Carr worries about shortages next winter.

"We have to build to 3 trillion cubic feet of storage from a low level we have never been before, and we will be fighting the increased demand of summer," Carr said. "It will be interesting to see if we can do it."

This winter has served up an expensive lesson, one that the country seems to have to repeat periodically. Many experts think it should lead to opening more public land for drilling reserves. They also say it will lead to greater emphasis on conservation and making all of our electronic gismos more efficient.

Carr, for one, hopes it does not lead to a knee-jerk energy policy, as leaps in prices sometimes have in the past. He said it does no good trying to assign fault:

"This is everybody's fault, is what it amounts to."

To reach Eric Palmer, regional business editor, call (816) 234-4335 or send e-mail to epalmer@kcstar.com.

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-- Martin Thompson (mthom1927@aol.com), February 04, 2001