Wednesday, April 06, 2005

Sure, If By "Efficiency" You Mean "Out Of Gas"

You have some sympathy. The markets go nuts; his job is to calm them a bit. He's done this for years, knows how they hang on his every word, knows a subtle word or two makes the traders in their pits stop from their adrenalin-fueled, sweaty yelling, change directions a little. Not too high, not too low, and always the voice of moderation.

So now Greenspan counsels the oil companies to redouble their efforts, the energy markets to take a breather. Listen:

"Markets for oil and natural gas have been subject to a degree of strain over the past year not experienced for a generation," Greenspan told the National Petrochemical and Refiners Association Conference in San Antonio, his remarks being delivered via satellite. "Increased demand and lagging additions to productive capacity have combined to absorb a significant amount of the slack in energy markets that was essential in containing energy prices between 1985 and 2000."

Since then, oil prices have risen markedly, especially in the last year. In reaction to the doubling of oil prices, consumption in the U.S. has not decreased, Greenspan said. But the rate of increase has stalled. In the natural gas market, Greenspan said, there has been "significant gains in gas efficiency among a number of gas users such as petroleum refineries, steel mills and paper and board mills," leading to an actual decline in natural gas usage since 1998.

It's only a capacity problem, he tells us. But there's one big, honking problem with this: his comment is meretriciously sly. He's correct, strictly speaking, that the EIA's own figures (Excel spreadsheet) say that US industrial consumption of natural gas has decreased since 1998. However, the reason he used 1998 as a breaking point is clear once you look at the spreadsheet. In 1997, the EIA started breaking out electricity generation as a separate line item, an item that's set to explode with a huge increase in the number of gas-fired power plants. Second, overall gas consumption has stayed steady at around 22,500 Tcf since 1997. Any declines in industrial use are being made up for by increases in residential and electrical generation.

Second, Americans might not want to hear about the way natural gas demand destruction is going on, thanks in part to the implications for their own lives. One of the most voracious consumers of natural gas is nitrogen fertilizer manufacturing, and the Fertilizer Institute reports 20% of US capacity is permanently closed (PDF) thanks to high natural gas prices. You can imagine what political hell would be loosed if 20% of the cars on the road were forced to stop operating because of a lack of gasoline. However, in the "optimist" side of things, the TFI report above mentions a new joint initiative by Rentech and Royster-Clark to use gasified coal as a feedstock. (On the other hand, with all the new coal gasification projects coming onstream, I wonder whether anyone has done any depletion analyses on coal besides "it will last 300 years at present rates of consumption"?)

I expect neither honesty nor comprehension of the problem from Greenspan; depletion isn't his forte. Ultimately, the markets will sort this out, though not in ways we might like.

For Greenspan, the big difference between now and six months ago seems to be that the price for oil futures has solidified at higher levels as the world has gotten used to higher current prices. This is a problem now, but one that will lead to its own solution. Sustained higher price will "stimulate the research and development that will unlock new approaches to energy production and use that we can now only scarcely envision," Greenspan said.
And to the extent that the government remains a roadblock to that future, I keep my fingers crossed that someone will get to that future without their "help".