Friday, November 12, 2010

China and India Get It, Why Can't We?

There was a great piece at the Financial Times web site yesterday noting two important developments:
  1. A shale gas technology sharing pact between the U.S. and India like the deal signed earlier this year between the U.S. and China, and
  2. An memorandum of understanding agreement between LNG company Cheniere Energy and China's ENN Trading to contract processing capacity at Cheniere's Sabine Pass facility.
What's in common here?  China and India understand the importance of natural gas.  They get it.  

For all the bitching and moaning by the U.S. several years ago when we backed out of the Kyoto Protocol ostensibly because developing nations - especially China - were still big polluters, few nations have done more to bring cleaner energy to the forefront in the last few years than China.  To keep up with demographic shifts and economic growth, China still builds lots of coal-generating power plants, but the country is taking real steps forward, especially where it concerns natural gas.  
This is happening with full government support in both China and India.  Some of each nation's biggest companies are in on it too.  China's CNOOC has agreed to a big investment in the Eagle Ford Shale and India's Reliance Industries has made several big U.S. shale investments.  

One of the things that makes the U.S. great is our free market economy.  No other country can match it.  But when government tinkers with the workings, people tend to go ape.  We certainly have seen that the perception of government meddling has stoked lots of fear and anger in recent years.  

But what is our free market market economy saying about natural gas right now?  It's saying that it is unwanted in abundance, evidence the prolonged depressed price for the commodity.  This is an unfortunate conclusion because natural gas is a better fuel for the U.S. to use.  It is domestically produced and creates much less pollution than oil and coal - better for the economy and the environment. 

But I have serious doubts that the free market will readily adopt natural gas on its own.  Market forces tend towards the lower cost solution.  The lower cost for power generation is coal because the utilities have a built-in incentive to use coal.  The higher cost of a coal plant relative to a gas plant ultimately burdens the ratepayer, but the lower commodity cost of coal benefits the utility.  The ratepayer doesn't have voice in the transaction, so the utility makes an economic choice that benefits itself.  For transportation, oil is the preferred fuel because the infrastructure for oil-based fuel distribution and vehicle technology is already there.  Changing both will be expensive.  Unfortunately, the greater good does not play in this equation.  

If we are to see greater and faster adoption of natural gas, the government has to participate in the process.  How?  Government intervention usually takes the form of incentives and penalties, the carrot and stick system.  Government can create incentives (grants, tax benefits, etc.) to convert vehicles and fueling infrastructure to natural gas.  This is being done to a limited extent.  Government can also create economic penalties for utilities that pollute, especially through the excessive use of coal.  But this is more of a political buzz-saw - just ask a handful of soon to be former Congressmen from coal states who supported environmental legislation.  

Much is being made of how politically divided Washington has become.  I'd go a step further and say that it is politically disabled.  I think some politicians get natural gas and its benefits, but I think it faces a steeper uphill climb than it did before the recent elections because of an increased sentiment towards reducing government's role in the economy.  I'm encouraged that I haven't heard the President utter the fictional concept of "clean coal" in a while, but I have my doubts about Congress.  I doubt they will be able to make it through the morning benediction without some kind of silly partisan dispute.  

But the reality is that greater acceptance of natural gas solely by the free market forces will take many, many years unless there is some kind of external push.  As I see it, the only entity that can provide the push is the government.  We need to accept it and move forward to see the best fuel win.

No comments: