Friday, October 22, 2010

Politics and Progress?

One thing is certain about the upcoming elections on November 2:  Republicans will make gains across the nation, including in the House, Senate and various governors' mansions.  Everything else, most notably to me energy policy, is uncertain.

With the failure of a comprehensive energy policy or any restrictions on carbon dioxide output, the state of the energy industry is in flux.  It won't stop producers from producing or users from using, but there is no clear direction about the future.  Natural gas is suddenly abundant, but any gains it makes will have to be through a market that is already dominated by coal.  It's not just a case of the best fuel winning. There is tremendous infrastructure (physical and political) supporting the coal industry.  But the gas industry risks drowning in its own supply before then.  Basic supply and demand will keep the price of gas supported so that it is not go to zero, but that kind of subsistence lifestyle won't support development of our resources and it might lead to the demise of many producers.

But the market itself is in turmoil. Cheap natural gas has shaken it to its core.  Because it used to be expensive, natural gas long was the pricing metric for other forms of electricity production.   But with gas hovering around $4/MMBtu, you can't effectively develop new nuclear or alternative energy.  The good news for gas is that it is more attractive as a baseline fuel, but as soon as consumption picks up, the price will rise a little, making coal more attractive.  It's a cat and mouse game that will play out for a long time in the absence of new sources of demand for natural gas.

Over the past few years there has been greater attention paid to the negative impacts of coal.  It pollutes land and water where it is mined and it produces lots of carbon dioxide and other airborne pollutants (including mercury).  It is relatively cheap to produce, but that might not be the case for much longer since it does not exist in unlimited supplies.

In my opinion there is no one right answer to the fuel question. I believe in a portfolio approach that balances efficiency and abundance, while providing resources for the development of new technologies. One thing is for certain, we can't go forward as a nation with coal generating just under half of our nation's electricity - it is simply unsustainable.

This brings us back to politics and government.  It looks like we are headed for a couple of years of logjam.  The ability to pass monumental but controversial legislation is behind us for a while.  My only hope is that with greater political parity our leaders will seek a middle ground to actually get things done.  But the rational side of me sees this hope as a romantic pipe dream.  We live in a time of highly polarized politics where the middle has been decimated by friendly fire and it is more of a DMZ than a meeting place.

But politics is a big business and business drives politics.  Sometimes I feel that NOT getting things done is the new progress.  Conflict and uncertainty drive the business of politics.  One of the themes I always come back to, however, is that the market hates uncertainty.  Some businesses might like it, for it creates opportunities to exploit, but the larger market hates it.

Why?  Look, for example, at a  utility with a growing customer base that needs to make a decision about building a new power plant.  Management probably wants to build a coal plant.  With the potential for legislation that will make the use of  coal more expensive, gas looks more attractive. But when will anti-carbon legislation get passed and what will it look like?  Who knows?  What does the utility do?  Punt on the decision for a few years and strain its existing facilities?  Choose coal and take a risk?  Choose gas and deviate from the norm?  A power plant is a 30 to 50 year decision, not one to be taken lightly.

As long as the real potential for energy and carbon legislation is out there, every decision will have this kind of risk.  It won't go away until there is some kind of action because interested parties will continue pursue legislation.  Opponents can't just kill it because it will return in another year or two.  That's why a lot of folks are trying so hard to sow doubts about man's impact on the climate - they hope to end the argument by poisoning the opposition.  The best bet is to pass legislation that has been watered down to the point where it is useless (and later bitch and moan about government waste).  But is that progress?

The one thing that is certain is that uncertainty is unsustainable.  Just ask the stock markets.

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