"The Five Minute ENERGY Blog: Post 2"

"The Five Minute ENERGY Blog: Post 2" by Tim Dunn

  by: Hugh Hewitt    

Here is the second installment of Tim Dunn's series on the American energy crisis. Part one is here. More to follow in the weeks ahead.

The 5-Minute ENERGY Blog POST 2: Gas: An Energy Success Story

The last Post argued that our Energy Future will largely be determined by who gets to decide, who gets to make energy decisions. If we have decisions made by individual Americans in a competitive market, we will continue to have ample energy. But if we have decisions made by central planners, we will see energy famine and perhaps even the return of poverty to America.

Consider the recent history of natural gas in America as a good illustration how this might work. But before we discuss how recent gas market developments might illustrate the power of the market in making energy choices, let’s first have a bit of conversation about what natural gas actually is.

“Natural gas” is primarily methane gas. It is organic. Methane is what you burn in your house if you have a gas stove or gas heater that runs on gas piped in from the gas utility. Methane gas has a chemical composition of one carbon atom and four hydrogen atoms. When it burns in the presence of oxygen, it converts to CO2 and H2O and releases heat energy, the fire you see on the stove. It is organic because it is made out of carbon and hydrogen.

Methane gas makes up a large part of the gas you might occasionally release from your colon. If a horse flagellates too near an open flame at just the wrong time and place, there will be a substantial ignition. This “poot” methane comes from the digestion of human food, which largely consists of molecules made up of carbon, hydrogen and oxygen. The word “carbohydrate” stems from two root words, carbon and hydrate, or carbon and water. Water of course is made of oxygen and hydrogen.

Decomposing organic material, such as food in your stomach, produces methane gas. There are companies that install gas gathering systems in landfills. They know the landfill will have a large concentration of organic matter, and will decompose and form methane gas. They collect the gas and sell it to power generation. http://en.wikipedia.org/wiki/Anaerobic_digestion

If you look up “organic chemistry” http://en.wikipedia.org/wiki/Organic_chemistry you will see the very definition of “organic” means made out of carbon and hydrogen. That is because that is the essence of life. The main building block of protein molecules is atoms of carbon, hydrogen and oxygen.

So methane gas is an organic fuel. As a way to remember this, think of natural gas, methane, as the earth flagellating. We burn this gas to generate heat.

Natural gas is generated by nature. Layers of shale buried miles under the surface contain perhaps 1 to 10% organic matter, which decomposes and forms organic molecules, including methane. Oil and gas companies drill holes in the ground to bring this gas to surface. Instead of a colon to transmit the gas, we use steel pipe in the ground.

So now back to recent developments in natural gas, broadly speaking in the 1990’s the wholesale price of natural gas averaged around $2.00 per MMBTU then in the 2000’s jumped to $6 and even $8. This price signal sent drillers scrambling for new gas sources, and they found it using fracture stimulation on shales.

The initial discovery was in the Barnett shale in the vicinity of Dallas Ft. Worth. Then the industry figured it would work elsewhere, and it did. Pretty soon drilling expanded to the Marcellus shale in the eastern states among many other places. The success was immense.

And, as you might expect, so much new supply came on that the price crashed. Currently wholesale prices are back below $2.

This is what happens when the market makes decisions. Imagine a different scenario where energy-crats faced the problem of increased gas prices due to limited supply. Would they go out and risk capital to seek a reward from the market to bring on new supplies? Doubtful. More likely they would impose price controls, guaranteeing the supply will shrink. Or perhaps create a rationing system, to ensure the most important users of gas get first priority.

As the energy-crat rationing program transpires, you can imagine the shortage will grow. This will allow the energy-crat communications department to decry the greed and mismanagement of the private sector, and expand the rationing program. To do that they will need more manpower, and more control.

So the market shrivels, the ability to choose is concentrated, innovation dies, and the energy market shrinks dramatically.

There are of course forces at work to promote just this sort of outcome. To them I would offer the noise often associated with certain releases of methane. To the entrepreneurs, investors, technology innovators and industrial workers I offer applause and thanks. This great system of self-governance continues to deliver bounty to be shared by all, and it is a successful wonder to behold.

http://www.hughhewitt.com/blog/g/e8ef5498-a6b9-400b-ab84-da1ac47983a9