Clean Over Green: Oil And Gas in a Low-Carbon Future

Even with the world having reached a modicum of consensus in Copenhagen, it is becoming clear that the global obsession with anything green has subsided. This is a good thing. We can now move from breathless anticipation of a green dawn, to the more sober work of systematically and thoughtfully building toward a low-carbon future.

A big part of this effort will involve fossil fuels. Natural gas, oil and coal should be given their due as crucial fuels of the coming decades. There is a commonly held view that we cannot transition to a carbon-neutral world without them.

The reasons for this are clear.

First, too much of the world’s infrastructure is built for fossil fuels and it will take decades to retrofit it for new and renewable sources of energy. Take America’s 211,000 miles of high-voltage power lines: Transforming this grid so it can take full advantage of renewable energy sources would cost $13 billion annually over 10 years. By contrast, the stimulus allocated $6 billion to the grid over two years — China’s stimulus bill allotted $75 billion for the same purpose.

Second, fossil fuels both are in abundance and have the potential to be source of relatively clean energy. Take natural gas, which provides 22% of America’s electricity. Not only is it the cleanest of the fossil fuels, the industry has reduced emissions by 36% since 1980. And America’s reserves of natural gas have doubled over the past two years, thanks specifically to dramatic advances in technology used to produce shale gas. The U.S. now has a 100-year supply of natural gas at current consumption levels. Meanwhile, LNG capacity also is increasing.

Congress and the Administration should consider redoubling their commitment to creating a level playing field in which all fuels — traditional and new — are encouraged to become cleaner (while also factoring in their cost). Incentives should be provided to remove carbon from oil and gas, as well as from coal; the best way to do this is to put a price on carbon.

If policymakers allow the current market conditions to persist by disadvantaging natural gas and oil, thus upending the balance in supply and demand, they could be laying the groundwork for another possible energy crisis with serious ramifications for the broader economy. A similar dysfunction exists in Europe, where take-or-pay contracts are distorting the natural gas market.

But the oil and natural gas markets face challenges beyond the policy front. Both are suffering from a collapse in demand. Globally, oil demand has fallen over 2 million barrels a day within the past two years. Both oil and natural gas markets have witnessed and continue to witness oversupply.

With natural gas, the long hoped-for increase in LNG has happened; but unfortunately it is happening exactly at the moment when demand has collapsed. Every spare LNG cargo has very low marginal cost and thus continues to be sent into already oversupplied markets, depressing spot prices. These spare cargoes are not going to Asia, but to North America and Europe, aggravating already severe imbalances in demand and challenging the take-or-pay contracts in European markets in particular.