A Free Market Conundrum

The United States is the largest producer and the largest consumer of natural gas in the world. Besides gas trapped in natural formations, technology has mastered geology with the fracking techniques developed largely without government subsidies, but by drilling, extraction, and oil companies. Recent articles have noted that a state like Pennsylvania, which sits atop the huge Marcellus shale formation that contains an estimated 10.3 trillion cubic meters of natural gas, could easily surpass North Dakota, Oklahoma and Texas as an energy-producing state. Due to environmental concerns, New York has a moratorium and Vermont has banned fracking. Regardless, the potential for using natural gas to wean ourselves from foreign oil are enormous.

Compare this with the Obama option- green energy. Supposedly, the whole crux of this policy is to develop, with government help, renewable energy sources like wind, biofuels, solar energy, electric cars, and to hear his recent speeches, maybe even algae. As part of the whole auto industry bail out fiasco- being touted as an American manufacturing success story- the electric car is supposed to the Obama panacea for green energy solutions. To date, only the Chevy Volt and the Nissan Leaf are on the market. In February of this year, despite government subsidies that total about $7,500 per vehicle, the auto industry sold a grand total of 348 of these vehicles (281 of them Volts). The problem with the electric car today is the same as the problem with the electric car of years gone by. It may surprise many to know that prior to the Model T, about one-third of all cars were electric. They were abandoned for the gasoline-powered internal combustion engine because gas-powered cars had greater range, greater speed, greater design, and they were cheaper.

The ostensible reason behind the electric car, indeed all green energy initiatives, is to (1) wean the United States from foreign oil as a strategic imperative and (2) to reduce alleged damage to the environment. The bulk of oil, whether produced domestically or imported, is refined into gasoline or diesel for use in vehicles. We do not use oil to power our generating plants; that is achieved by nuclear energy, coal, and natural gas. Since most of our electricity is generated by coal and since electric cars must be recharged with electricity likely produced by coal, it is more realistic to view electric cars as being powered by, at the end of the day, coal.

But of course, Obama and his henchmen at the EPA have this distaste for coal. So, we are placed in our first conundrum. If electric cars are the great wave of the future, we have to rely on what we have now to power that great wave of the future. But, Obama does not want it that way. The options are to then generate electricity by other means. His preference is so-called renewable sources. However, to completely replace coal with solar or wind energy would require huge solar or wind farms, or something else. Nuclear energy would seem to be a solution since once built, nuclear plants are fairly reliable and efficient producers of electricity AND they contribute absolutely no carbon dioxide to the atmosphere as a by-product, if that is your unwarranted concern. But, the disaster as Fuukishima, Japan has pretty much put a damper on that idea. And even though Obama talks a good game when it comes to nuclear power, his actions (or lack of action) speaks louder.

There is a solution and that is natural gas. The gasoline-powered automobile can be converted to run on compressed natural gas. Likewise, power plants can be converted to run on natural gas. The US sits on vast untapped reserves of natural gas. Hence, would it not make greater sense to subsidize natural gas exploration and extraction than invest $7,500 per vehicle in a dubious idea like the electric car? Instead, wouldn’t a better use of that money, if you are to spend money in the first place, go towards converting existing cars to compressed natural gas?

But now we face our second conundrum. Due to advances in technology when it comes to finding and extracting natural gas domestically, the price has dropped as the supply has increased, as expected. In fact, due to the decrease in natural gas prices over the last two years, it is estimated that consumers have saved over $65 billion in heating bills. As the price of natural gas has dropped, the price of oil has increased and is expected to stay near the $100 per barrel plateau for a while. That is, it is now more lucrative for private business to extract oil using the very technology that proved successful in extracting natural gas. And in fact, we now see the free market drifting from domestic natural gas extraction to domestic oil extraction. One example is the natural gas fields in northern Louisiana and even some in Pennsylvania. Several efforts have been put on hold as available drillers have shifted their operations to oil drilling in central Texas and North Dakota. North Dakota has an unemployment rate of 3% and that could drop further as more drillers for oil move into the state. In fact, the state estimates that they will realize about $4 billion in revenue and increase production from 500,000 to a million barrels of oil a day. Incidentally, the biggest complaint from the citizens of North Dakota is in the increased traffic because they certainly appreciate the revenue, increased home values, and good-paying jobs the energy industry has brought the state. Unfortunately, New York law makers are not as bright as those in North Dakota. Even more unfortunate is the fact that New York and Pennsylvania sit in the middle of a population hub hungry for energy. The bottom line is that the domestic free market follows the money and the money now is in oil.

However, the promise of natural gas is the “loser” in this scenario as our reserves remain untapped for a future day. Therefore, should the government intervene and demand or coax the industry to continue domestic extraction of natural gas even though it may not be as lucrative for private industry as oil? Should the government encourage the use of natural gas, which releases the lowest amount of CO2 of any fossil fuel, in energy company portfolios? Assuming we shift to a natural gas generating system, what do we do about coal? Should we export that coal to countries that insist on its use? Obama’s “war on coal” (certainly more expensive than any perceived “war on women”) need not be the death of the coal industry in America. Would it make more sense to subsidize CNG cars rather than electric cars? Or should we just let the free market decide these questions? My fear is if the government sits idle, natural gas exploration and extraction will slowly drift to the back burner and at some point in the future, we will be destined to relive the present- no closer to energy independence than we were during the Carter Administration.

Mitt Romney needs to articulate an energy policy that balances on that fine line between government intervention and the free market. This country has the obvious potential to become a net exporter of coal and natural gas. That will not be achieved through CAFE standards or electric cars, offshore wind farms, or algae-powered whatever.