Energy: What’s Up Now?

Sept. 6, 2001
Mitigate the risks now and pending in energy markets

Unless you have been on extended vacation at some isolated resort, you must know that "deregulation" now is a bad word in California and a suspect word in many other states.

Unfortunately, what happened in California was not deregulation at all. It was a faulty form of restructuring full of regulations that ultimately drove one utility into bankruptcy court and is threatening another. Prices were encouraged to rise unchecked, and supplies were allowed to lag behind demand to a critical extent. Political heat of runaway prices for electricity drove Governor Gray Davis into converting the state into the power buyer of last resort. His plan might have reduced the risk for ratepayers, but it transferred some of the cost to taxpayers who now must help foot the bill for an estimated $40 to $50 billion in long-term contracts for electric power over 10 years or more. Consumers still face higher bills because the "sky is falling" mentality drove press reports before natural market/economic forces could work out corrections in due time. The only winners so far have been lawyers who are thrashing out solutions in the courts.

Consumers have reduced demand throughout western states more than expected, and some construction of new power plants has been accelerated, so the imminent threat of summer blackouts has been eased. But the long-range fallout of the California crisis now looms over the entire nation. President Bush has said we face an energy crisis worse than the 1970s.

Whether you have buildings in deregulated states or not, it seems like a good idea to learn all you can about energy management so you will prevent crisis situations that could be avoided with a little planning. Here is a quick review of where we are, where we seem to be headed, and some specific ways you can reduce the risks of energy costs and maintain reliability in the future.

Where We Are

The Energy Information Administration (EIA) ( released figures recently that include both good news and bad news about our energy situation. The good news is that the United States has significant reserves of fossil fuels. The bad news is that production is not keeping up with demand because controlled prices and environmental policies stifle incentives for increasing output. Following is a summary fuel-by-fuel from a compilation by Will McNamara of Scientech Inc. (

Oil. We have 21.8 billion barrels of proven oil reserves, mostly in Texas (25 percent), Alaska (24 percent), California (21 percent), and Louisiana (14 percent). There is an estimated 10.3 billion barrels under the famous Arctic National Wildlife Refuge in Alaska, but it is off-limits to drillers. Unfortunately, our profligate use of oil for heating and gasoline requires twice as much imports now as during the infamous OPEC crisis of the 1970s. We use about 19.5 million barrels per day, but produced only 8.1 million barrels per day in 2000. U.S. oil drilling peaked in 1981 with a total of 43,958 wells, 20,166 of which were gas wells. For all of 2000, only 4,731 oil wells and 15,206 gas wells were drilled. The Organization of Petroleum Exporting Countries (OPEC) has gotten much better at controlling its output to push oil prices up just to the brink of worldwide recession and keep them there.

The top foreign suppliers to the United States are Canada, Saudi Arabia, Venezuela, and Mexico, with 22 percent of our supplies coming from the Persian Gulf reserves, and 46 percent from OPEC nations.

Natural Gas. The United States has 167 trillion cubic feet (Tcf) of natural gas, only 3.2 percent of world reserves, and consumes it at a rate of 22.8 Tcf per year. We import only 3.6 Tcf, mostly from Canada. Wellhead prices averaged $6 per thousand cubic feet (mcf) during first-quarter 2001, up sharply from $3.62 in 2000 and nearly triple the 1999 average price of $2.08. The increase is attributed largely to the growth in demand for gas driven by new electric power generation, and dropping gas storage levels, combined with distribution constraints. Gas consumption in the United States increased 22 percent from 1990 to 2000, and that rate is expected to increase because gas is forecast to be the dominant fuel for new power plants. Gas consumption is forecast to reach 31.5 Tcf by 2020. Distribution of demand by sector is industrial (41 percent), residential (22 percent), commercial (15 percent), and electric power (13 percent). The forecasted rise in gas consumption will require an investment of $1.5 trillion over the next 15 years for pipeline construction and storage capacity expansion.

Coal. Coal is the nation's most abundant fossil fuel - the largest in the world, but the least preferred by environmentalists. The estimated recoverable coal reserve is 275 billion short tons, of which about 19.3 billion short tons were ready for recovery at the end of 1998. We produced 1.074 billion short tons in 2000, mostly from mines in Wyoming, West Virginia, and Kentucky. Employment in mines has dropped from 700,000 in 1923 to around 80,000 workers, partly due to vastly increased productivity. Still, miners face health and safety issues that cause concern. Electric power plants consume the vast majority (90 percent) of coal production. EIA is forecasting only a modest increase in coal production, up to 1.3 billion short tons annually by 2020 because of opposition to pollution associated with coal combustion. However, coal producers offer increased electricity output fueled by coal as the cheapest, quickest, and safest way of expanding power generation, if not the cleanest.

Electricity. U.S. electric generation capacity was pegged at 687 gigawatts (GW) going into 1999. On a capacity basis, coal-fired generation dominated (40 percent), followed by gas (21 percent), nuclear (13 percent), hydropower (13 percent), petroleum (9 percent), and renewables, including solar, wind, and geothermal (3 percent). The demand for electricity is forecast to increase at 1.8-percent annually through 2020. At that rate of growth, the United States will need to build 1,300 new power plants, roughly one every week for the next 20 years, and 38,000 miles of new transmission lines. Capacity of transmission lines actually declined 16.2 percent from 1980 to 1998, and although some growth of 4.2 percent is expected this decade, power demand is forecasted to grow 20 percent. President Bush has rejected calls for restricting power plant emissions further because it would be too costly and not practical to cap carbon emissions and still meet our growing economic output.

Lewis Tagliaferre is proprietor of C-E-C Group ([email protected]) and provides "Bottom Line Energy Issues" for e-mail news. George R. Owens, PE, CEM is president of Energy and Engineering Solutions Inc. ([email protected]). He was named the International Energy Manager of the Year (1994) by the Association of Energy Engineers (AEE). A registered professional engineer in five states, Owen was elected president of AEE in 2001.

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