Mike Pomorski Natural Gas – the insurance fuel

You have probably heard natural gas referred to as a “bridge fuel,” with the idea being that we can use gas as a bridge between a fossil-fueled economy to one based on renewable energy.  Fair enough.  But natural gas, and particularly access to gas supply, is also a lot like an insurance policy.  Natural gas is an insurance fuel because it is abundant, inexpensive, low-carbon and able to step into virtually all energy related applications in the potential scenario where other technologies are not ready.   Natural gas is also an insurance fuel in the sense that if we limit access to gas supply (through geographic restrictions, limitations on hydraulic fracture, failure to site LNG import facilities, restrictions on pipelines, etc.) we are essentially gambling that we will have sufficient non-natural gas resources to drive the economy over the next several decades.

The Energy Information Administration’s (EIA) analysis of the American Clean Energy and Security Act of 2009, a.k.a. H.R. 2454 a.k.a. Waxman-Markey demonstrates what I mean.   EIA’s analysis has gotten quite a bit of press, and for good reason.  People that think about what climate regulation will mean for energy markets and the larger economy in the United States should read the full report, or at least peruse the Executive Summary.

So what does EIA project will happen to gas consumption under Waxman-Markey?  Well, it depends on which case of assumptions you use (EIA reports on 11). In one case, EIA forecasts that natural gas consumption in 2030 will be 25.7 Tcf.  In another, consumption will be 19.8 Tcf.  For some context, annual consumption in 2008 was 23.2 Tcf, so according to EIA’s analysis, under Waxman-Markey, consumption of natural gas will either increase or decrease.  This is perhaps not an Earth-shattering revelation.

Now, this in no way decreases the quality and importance of EIA’s modeling.  In fact, it points to good modeling practices.  No one can predict the future.  The best we can do is evaluate what might happen given a different set of assumptions.  Early in the report, EIA writes that “EIA cannot attach probabilities to … individual policy cases” (p. ix).   That is, the fact that there is a “Basic Case” among the model runs does not mean that EIA thinks that it is the most likely to occur.  It is hard to overstate the importance of that statement.  Future changes in the energy landscape (deployment of renewables, new nuclear capacity, availability of offsets for carbon abatement, etc.) are uncertain.

There are a few ways to deal with uncertainty.  One is to roll the dice, or to insist that your crystal ball is better than the next guy’s and act accordingly.  Another is to hedge your bets and buy insurance.

EIA’s modeling shows that there is the potential for Waxman-Markey to significantly increase the demand for natural gas, but that this increase is uncertain.  How can we deal with this uncertainty?  We can gamble (a bold move considering what is at stake) or we can get insurance.  Perhaps renewable energy and energy efficiency will be able to significantly reduce our natural gas consumption. Then again, perhaps not.   A policy of robust access to natural gas supplies provides the type of insurance we need in the event that alternatives do not pan out.

One more thing. You can support access to natural gas supplies even if you hope it that the supply is never extracted.  You are probably pretty confident in your driving, and you probably hope that you never have to report a claim.  But that does not mean you are going to forego car insurance.  Why should energy markets be any different?

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