Foes of fossil fuels are wondering if natural gas production in the United States is peaking. While some observers depict the supply of natural gas as lasting decades, maybe a hundred years, others see signs that gas wells in the Marcellus shale formation are playing out more rapidly than anticipated. As supply becomes constricted, prices will rise, punishing electricity consumers who in Virginia will relying increasingly upon natural gas for electric generation. To protect against inevitably rising gas prices, the argument goes, states should mandate the use of renewable energy sources such as solar and wind power.
Environmentalists aren’t the only ones making the argument that gas production in the Marcellus formation has peaked. Oil and Gas Investments Bulletin Publisher Keith Schaeffer, among others, makes the same case.
But that sentiment is far from universal. “The U.S. may have far more natural gas than anyone imagined, all reachable at a profit even with today’s bargain-basement prices,” states the lead of a Wall Street Journal article today. The article quotes Mark Papa, a partner of Riverstone Holdings LLC, an energy-oriented private equity investor, as saying, “There’s a large likelihood that the United States will be enjoying very low gas prices for a very long time, maybe 20 years.”
Fossil fuel producers are showing remarkable resilience in the face of incredibly low fuel prices. They are embracing new technology, pioneering new drilling methods and figuring out how to slash production costs. Meanwhile, designers of power plants that burn natural gas are developing combustion systems that can extract 50% more energy from a BTU of gas than the previous generation. Traditional gas turbines convert 32% to 38% of the heat content from gas into electricity. The latest gas turbines incorporating advances in materials and aerodynamics and running in combined cycle mode can operate at 60% efficiency under optimal conditions.
The competition between different types of energy source is good news for consumers. The price of solar power and wind power continue to drop as R&D efforts yield technology breakthroughs, as supply chains mature, and as the solar and wind industries move up the learning curve. If the gas production/ generation industry had remained static, solar and wind might well be broadly competitive today. But the gas industry continues to innovate as well. Wind and solar (and coal, too) are chasing a moving target.
There is something to be said for hedging Virginia’s bets by encouraging the diversification of energy sources used in generating electric power, as there is for investing in energy efficiency, another field rife with innovation. But there’s also something to be said for committing to the lowest cost energy source, especially if, like natural gas, it is clean burning and emits significantly less CO2 than coal. Rather than approach energy policy with preconceived ideas that one energy strategy or the other is “the best,” Virginia should aim for an energy strategy that is flexible, adaptable and capable of exploiting opportunities created by an innovative energy economy.