Friday, April 13, 2012

Natural Gas Glut Means Big Changes in the Economy and the Environment – Some of Them Even Positive

Amazingly, A Lot of Them Are Positive

The science of Economics is cruel.  Every time something good comes along something bad comes along.  In economics this is called the ‘trade-off issue’ or more commonly, ‘there’s no such thing as a free lunch’.  Fortunately this does not mean that the bad completely offsets the good all the time, it simply means that one has to recognize the costs in addition to the benefits. 

The huge boom in the production of natural gas in the United States is an economic explosion of good, with some bad, but overall the net impact is good.  The major bad is the environmental cost of extracting natural gas and oil by the process of fracking.  This has the potential of huge environmental costs.  Fortunately this risk is known and one hopes that despite Republican’s aversion to regulation, rational people will prevail and the regulation of production will be strict and the harm to the environment will be minimal.

On the plus side  particularly with respect to the environment is the fact that natural gas can and will replace the burning of coal to produce electricity.

Cheap gas is stealing power-generation markets from coal, spreading gloom across a mining industry that is being spurned by its most important customer. . . . In 2008, when gas prices still were high, Southern got almost 70% of its electricity from coal. Today, it is getting less than half as much power from its coal fleet. Gas-fired plants now are responsible for 46% of its electricity, up from about 16% four years ago.

Coal is an awful source of energy.  It is environmentally destructive to mine and it is environmentally destructive to burn.  Every critic of fracking should be forced to spend a week observing coal mining and coal burning. 

But as we said, there is a downside.  The biggest downside in the energy area is that cheap and plentiful natural gas will reduce the economic incentives for other forms of energy.

The economics of building a nuclear plant, wind farm or solar-power installation look shakier than ever.

and while no one will mourn the loss on one less nuclear plant, lower wind and solar generation is not a good thing.

Still another huge benefit is the lower cost of electricity for consumers.

The biggest winners from all this: electricity consumers. In February, Boston-based utility NSTAR told its business customers that it will cut their retail electricity rates 34% this spring, to 5.5 cents a kilowatt hour from 8.5 cents. In May, it expects to announce rate cuts for residential customers, too.

In many parts of the U.S., cheap gas is pushing wholesale power prices down to two cents to four cents a kilowatt hour. In New England, for example, wholesale power prices were often in the three- or four-cent range in February, compared with six to eight cents on average that month from 2006 to 2011, according to the Energy Information Administration.

Utility costs are like taxes.  When they go down it is the economic equivalent of a tax cut, because it increases discretionary income and increases discretionary spending.  Once economists get a chance to study things, they may well find that the lower energy prices from the natural gas glut was close to the level of the 2009-10 Stimulus in its impact on the economy. 

Yes, that is a good thing, except for Republicans who are counting on and desirous of a bad economy for partisan election purposes. Sorry GOP, but hopefully if you do get the Presidency things will get worse.  In fact, given your policies we can practically guarantee it.

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