How to Add 2.1 Tcf to the Natural Gas Balance in Five Years

Abstract: Two historical examples illustrate that demand-side initiatives in a tight market invariably generate immediate and significant impact on the energy supply/demand balance.

Analysis: The "c" word is back in energy.

The "c" word is "conservation." Only this time it is not the centerpiece of some radical environmental manifesto. Instead the newest advocates of conservation as a solution to tightness in the natural gas markets are from an entirely different spectrum of the public debate over energy.

Today's conservation advocates are found in the oil and gas industry, energy think tanks, and the U.S. Department of Energy.

In fact, a growing consensus in the energy industry now argues that the number one way to avert a short-term problem in the natural gas industry is for consumers, both residential and commercial, to use less natural gas.

Conservation can be voluntary, as when consumers respond to high price signals and take steps to reduce use. Or it can be involuntary in the form of demand destruction when high prices literally drive consumption out of the market. Both examples are evident in the energy markets over the last three years. Demand destruction has had a disproportionate impact on industrial gas use, particularly in industries that rely on plentiful supplies of inexpensive gas, such as paper, chemicals, fertilizers, and primary metals.

Industrial gas consumption declined by more than one Tcf over the last six years according to the Energy Information Administration. Unfortunately, involuntary conservation through demand destruction is accompanied by job losses and economic dislocation.

Proactive conservation can avoid the economic downside inherent in an economy forced to react to sudden energy price spikes.

Today's conservation message comes in a variety of forms. There are the traditional methods. Usually these are local or state utilities who publish tips on what consumers can do to reduce use and lower the costs of soaring utility bills.

These educational programs have existed for years.

But now the message has grown more insistent. At a National Petroleum Council-sponsored Natural Gas Summit last summer, energy industry officials—along with U.S. Secretary of Energy Spencer Abraham—argued for a broad program of natural gas conservation as a means of getting through the current tight supply situation.

The summit featured Dow Chemical president William Stavropoulos calling for a national campaign to cut energy use by five percent. Cambridge Energy Research Associates chairman Daniel Yergin was quoted as listing conservation as "the biggest near-term solution to the supply/demand imbalance."

Conservation was a key component in the recent update on the natural gas industry authored by the National Petroleum Council. The report argues that "reducing demand is the primary means to keep the market in balance because of the lead times required to bring new supply to market."

Conservation is also a prominent cornerstone in Arnold Schwarzenegger's initial energy proposals for the state of California.

It may be time to think of conservation as a productivity increase. Productivity gains in technology and manufacturing propelled the American economy upwards in the late 1990s. Conservation proponents say it is possible to extrapolate those gains into the energy sector.

Conservation programs targeting less efficient aspects of the market, both in terms of sector and geography, can reduce natural gas price volatility. For example, gas is used most frequently to generate electricity during peak demand periods. However, gas used in this manner is far less efficient than using gas in combination with other methods to generate normal electricity loads. In other words. efforts to reduce peak electricity demand save natural gas and ultimately reduce prices.

The American Council for an Energy-Efficient Economy has identified readily achievable savings through efficiency of up to 10 percent of current consumption in the residential and commercial sector over the next five years. It is the equivalent of adding more than 2.1 Tcf in production, something the nation has been unable to do in half a decade, despite massive capital investment in drilling and exploration.

A September report published by the ACEEE argues that changes in state and federal energy guidelines to increase natural gas efficiency and electrical consumption, coupled with an expansion of renewable power generation, could shave 1.9 percent off current gas consumption levels and reduce electricity consumption 2.2 percent. Over the next five years, that would translate into a 3.2 percent reduction in electrical consumption and a 4.1 percent reduction in natural gas demand, reducing wholesale gas prices 22 percent.

From the consumer's standpoint, this translates into savings of $75 billion spread across the residential, commercial, and industrial sectors.

Among the portfolio of ACEEE strategies are the following:
  • Energy efficiency performance targets.

  • Expanded funding for energy efficiency and renewable energy programs.

  • Appliance efficiency standards.

  • Changes to building codes.

  • No doubt talk of impending crisis stimulates various constituencies to promote their respective agendas. Thus solutions to the present angst over the inability to generate additional gas supplies range from energy industry demand for greater resource access and tax breaks for encouraging production, to think tank arguments promoting conservation.

    Do these approaches work? So far the supply side response from increased capital investment to drill for natural gas has not produced results. On the other hand, there are historic examples that indicate demand side responses produce bigger impacts in a shorter timeframe.

    There are two identifiable examples. The first is the California energy crisis in 2000. Through a combination of efforts, residents in the state of California reduced peak electrical energy demand by 10.4 percent within a year and shaved total electrical consumption by more than six percent, according to the California Energy Commission (see June 04, 2003 Workshop and choose 2003-06-06_SB_Trends… for further information).

    The second, and more intriguing, example involves conservation of another source of energy—petroleum—after the second oil shock in 1979. By government fiat, automotive fuel efficiency standards were raised rather modestly after 1979. American-made cars improved efficiency by seven miles per gallon over six years. The consequences were enormous. U.S. oil imports from the Persian Gulf dropped 87 percent, according to the journal Foreign Affairs. In the eight-year period ending in 1985, U.S. GDP rose 27 percent while oil imports dropped 3.74 Mmbbls/d, or 42 percent.

    When measured in terms of economic output per unit of oil consumption, U.S. oil productivity rose 52 percent over those eight years thanks to conservation efforts. If such efforts were applied to natural gas, the consequences would no doubt be positive.

    In truth, conservation offers the best short-term solution to those who believe a natural gas crisis is imminent. So far, the industry has been unable to drill its way out of natural gas constraints because of the long lead times in bringing additional supply to market. Longer-term, it will take a combination of conservation and increased industry effort to solve structural imbalances in the supply/demand picture.

    That's got folks talking, which is why you can expect to hear a lot more about the "c" word in energy going forward.