It sounds incredibly counterintuitive, but one step we could make toward moving away from fossil fuels is to export the massive quantities we have here in the U.S. thanks to the boom in oil and gas production.
I know, I know. I can see the steam coming from your ears from frustration. But just give me five minutes to explain.
Let's take a look at why it makes sense, and how we can use fossil fuel exports as a way to reduce and our dependence on them and in turn reduce carbon emissions.
Why fighting against fossil fuel exports doesn't really help
To understand why supporting U.S. exports of fossil fuels is a step in that direction, let's explore why fighting against them actually hurts the cause. For there to be any chance of significant emission reductions from fossil fuels, alternative energy needs to be a better alternative on a pure economic basis, plain and simple. Not political action, not advocacy, pure economics. I could expand on that, but it's better explained here.
We are getting to the point that our production of natural gas is greater than our demands and our capacity to refine oil coming from shale is maxing out. Without a release valve -- in this case, exports -- we will exceed our internal capacity to refine crude oil or consume natural gas and prices will in turn plummet. Just look at what happened to crude oil when there wasn't enough takeaway capacity to our refineries.
Without adequate infrastructure, the price for domestic crude was anywhere between $15-$20 less than international prices. The same thing happened with natural gas, Henry Hub spot prices went below $2.00 per million BTUs in 2012 from booming production and a lack of demand. Many of these market constraints have gone away because of new pipelines. If our capacity to refine crude or consume natural gas is overwhelmed by domestic production and we can't export it, however, then we could very well see a significant price drop compared to what the rest of the world pays.
So why is this bad for alternatives? Because it keeps the price of these fuels artificially low in the U.S., which in turn discourages investment in alternatives. In fact, the same can be said about coal as well. Even with the expansion of EPA's regulations on coal power plants, the price for thermal coal is so cheap that utilities still have plans to install 5GW of coal power plants between now and 2018.
In certain parts of the country, alternative energy can compete straight up with fossil fuels, but not everywhere. This chart from fuel-cell manufacturer FuelCell Energy shows the levelized cost of energy for various sources.
One of the things that really stands out on this chart is that solar and wind are cost competitive with the most attractive fossil fuel option today: combined cycle natural gas turbines. The one thing to keep in mind from this chart, though, is that it is basing it on a natural gas price between $6 and $8 per million BTU. Today's gas prices are about $4.50 per million BTU, so it's even less than what this chart suggests.
If the U.S. were able to expand its export capacity for oil, natural gas, and coal; domestic prices would increase and alternative energy investments would be more attractive.
It's the less bad option for now
I know what you are thinking. Exporting U.S. fossil fuels would just lower global prices and everyone will continue to burn more carbon-based fuels, but there are two important factors to consider:
1. Other global factors will prop prices up. Surprisingly, the U.S. is the low-cost producer of oil and gas in the world today. The reason for this is that the major sources of oil and gas around the world -- namely OPEC and Russia -- need prices much higher than us to fund their federal budgets. In the event that the U.S. were to increase production of oil and gas and export it, it is more likely that it will displace oil production from other parts of the world rather than flooding the market. Places like Saudi Arabia are much more willing to shut in production capacity to preserve high prices rather than selling it at a price that doesn't make economic sense to them. With prices remaining high, it will encourage investment in alternative energy both in the US and abroad.
2. U.S. resources are actually less carbon intense than those from other nations. Take a look at this chart based on data from IHSCera, it shows the total CO2 equivalent for producing a barrel of oil for various locations around the world. The production of West Texas Intermediate crude is by far and away the least carbon intensive oil source, and in some cases it is 15-20 times less intense than from major oil exporting regions such as Venezuela and the Middle East.
This isn't just unique to oil, either. Indonesian coal -- China's largest supplier -- has a low caloric value of 3,800 Calories/kg and a high ash and sulfur content. Powder River Basin Coal, on the other hand, has a 31.5% higher caloric value -- 5,000 Calories/kg, which leads to less total coal consumed per unit of energy generated -- and has 50% less ash and sulfur than Indonesian sources.
It's far from a perfect solution, but greater consumption of U.S. fossil fuels globally is low-hanging fruit that can have a temporary impact on global carbon emissions -- the ultimate goal of climate change policies -- while we make the transition away from fossil fuels.
What a Fool believes
For those who are ardent opponents of fossil fuel use, this idea probably makes you sick to your stomach. I get it. But one thing that needs to be acknowledged is that the world isn't going to move away from fossil fuels being the dominant energy source overnight. It's going to take years of development under the right economic conditions. If fossil fuel prices are too low, nobody will want to invest in alternatives; if they are too high it hampers overall economic growth. Today's international prices of $100-$110 per barrel seems to be right in that sweet spot. That is why this idea could actually work if used as a component of a broader energy plan over the next several years. Here is how it can be used to move away from fossil fuels.
By opening exports, it allows domestic fossil fuel production to grow and would be the equivalent of taking economic steroids. Another recent study from IHS estimates that if exports were allowed, average oil production would grow by 1.2 million barrels per day. This would significantly cut into the U.S.'s trade deficit, supply as many as an additional 2 million jobs domestically, and increase overall economic output, and that's just the oil side of things.
At the same time, exporting it would provide the right energy price environment to nurture development of renewable energy projects, which also is an added economic benefit. This is actually very similar to what Saudi Arabia is doing today. By upping its renewable production domestically, it can export more and more of its fossil fuels to fill the federal coffers.
As domestic demand for fossil fuels is supplanted by renewables, we can then continue to push more of them onto the export market until our production capacity starts to decline again. According to the US EIA, that is a 10-15 year window for oil and 25-30 for natural gas. By then, we will have hopefully built out enough renewable capacity that we will need significantly less oil and gas and significantly reduce the U.S.'s carbon footprint. We have a once-in-a-generation shot at making this transition while actually increasing economic output, and advocates of alternative energy could actually work with it to achieve their ultimate long-term goal.
I admit, there is the one weakness of this idea that will everyone will hate. It will likely mean that our energy prices will be higher in the immediate future despite our fossil fuel riches. But it is a give-and-take because it will lead to greater economic growth and wean ourselves off of it long term. So it will hurt a lot less further down the road as production declines again and prices get even more expensive.
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