Will the Lights Go Out?

An overview of the challenges facing the existing energy industry and the implications for alternative energy sources

One of the most necessary, yet taken for granted, resources we require is energy. The United States consumes more than its fair share of the global energy supply when compared to other countries -- nearly four times the amount of the second largest consumer, China. Globalization is now governing the energy balance equation of supply and demand. More countries, particularly China, have increased their need for oil and gas to support their fast-growing economies. China just surpassed Japan as the world's second largest oil consumer. India has not yet come fully on board with its energy needs, which also will increase world-wide competition for energy resources. The issues facing the energy industry are complex, multi-faceted, and full of competing interests.

Questions of Supply
There are, however, dissenting views about supply for the future. Dr. James Smith, Cary Maguire Chair in Oil and Gas at Southern Methodist University (SMU) in Dallas, recently explained, "There is a lot of misperception about supply being tight. The depletion story different people like to peddle is not accurate, i.e., that in 20 years no new sources will exist. In 100 years, we'll still have petroleum resources as we discover and replace that which we use."

The problem lies more in the fact that the Organization of Petroleum Exporting Countries (OPEC) controls many of the producing oil reserves in the world. We experience difficulties because of the rate at which OPEC releases oil to world markets and controls the supply. By 2008, OPEC countries will need to start increasing production as much as possible to meet even modest demand growth, energy analysts report. Other forecasts using proven reserve data expect oil reserves to be depleted by 2024.

Another problem is that oil supply data is becoming more controversial and difficult to rely upon. And there is much controversy concerning the methods that oil companies are using to define their proven reserves and place them on their books. This further complicates the explanation of the supply/demand curves intersection. Thus, the billion dollar question is: Where do the supply and demand data points for oil and gas fall?

Basic Economic Equations
Global demand for oil continues to rise, with China's economic growth and consumption an important factor. Economic growth and energy demand have a proportional relationship -- the more growth, the more energy demanded. Conservation measures can help dampen the total demand impact only to a limited degree. With most of the economic growth occurring in developing countries, this is where increased demand for energy will likely be found. Between 2000 and 2020, developing countries' share of world gross domestic product (GDP) will rise from just over one-quarter to more than one-third. Competition for resources will become even more marked if and when supply constraints occur. There is already a shortage of spare capacity to meet oil and gas demand in the United States. Consequently, when unusual (and yet typical) events happen like very hot summers or cold winters, shortfalls and power outages will occur.

Another issue complicating U.S. energy consumption is our ability to process and support energy demand with our current infrastructure. The refineries in the United States are near maximum capacity, running at about a 94 percent utilization rate. If one or two of them are partially out of commission due to incidents of abnormal operations, the whole supply chain is affected, which increases the potential for higher prices. Existing refineries have expanded their current facilities and use new technologies as they are developed, yet more refining capacity is needed. The last U.S. refinery was built about 30 years ago. This need is most evident in the Northeast where about 1 million barrels a day of refined petroleum product is imported. Drilling rigs are also at maximum capacity with an existing ban on new rigs for offshore continental shelf drilling. How can the United States become more energy independent and not explore new sources?

Natural Gas
Demand for natural gas for consumer and industrial markets continues to grow, and the United States consumes almost 25 percent of the world's natural gas. Current global gas reserves face a similar story as oil reserves. The former Soviet Union holds the largest reserves in natural gas, followed by Iran. However, liquefied natural gas (LNG) will play an important role in the future by supplying natural gas for U.S. demand. It is a needed supplement for many countries, including our neighbor Mexico, to support growing economies. But even Mexico has a limited capability to exploit and deliver the gas to its final destination.

LNG is the darling right now as the natural gas supply positions itself to replace oil in some areas; one of the main reasons is that it is a more environmentally friendly energy source. The Energy Information Administration (EIA) predicts that starting in 2004, and continuing over the next few years, the United States will likely become more dependent on LNG imports and other unconventional sources in order to meet accelerating natural gas demand. Our nation imports large volumes of LNG from Algeria, Malaysia, Nigeria, Oman, Trinidad, and Tobago. The United States, however, needs to build more LNG import facilities to deliver and regasify the LNG. We have four LNG import terminals in the United States and will need at least six to eight to meet the expected demand. A fifth import terminal, located offshore near Louisiana, is scheduled to be operational by early 2005.

Future Response
The comprehensive energy bill (H.R. 6), which was passed by the U.S. House of Representatives and more recently the U.S. Senate, includes some measures to head toward using more renewable forms of energy -- solar, wind, even nuclear -- and to utilize the resources we have. According to comments made by congressional panelists at the Energy Symposium presented by the Maguire Energy Institute of SMU's Cox School of Business in April 2004, the energy bill took several years to develop. It has credits for renewable sources of energy, such as solar and wind power, included in its comprehensive array. The energy bill, with its $18 billion dollars of tax breaks for the industry, moves in the right direction, but there is still the reconciliation between the House and Senate versions remaining. The longer the debate goes on, the further away solutions become and the closer we move toward real energy problems.

Our nation's energy policy, or a lack thereof, will ultimately affect our standard of living. Living with blackouts and, in the case of California, brownouts, may not be all that is in store for U.S. businesses and consumers. Policymakers must become educated about where and what the sources of energy need to be over the next several decades. Consumers will have to adjust to higher prices and try to find ways to conserve. A number of countries in Western Europe are already planning for the prospects of energy supply shortfalls with new programs to encourage renewables. Unfortunately, many renewables have yet to become economically viable, that is why subsidies are required to kick start these alternative forms of energy. Some renewables are environmentally questionable and not effective as oil substitutes because of transportation issues. Environmental concerns over new exploration for oil and gas, the use of particular fossil fuels like coal, and other problems with substitutes bog down the debate, and forestall action.

The Alternatives
As a civilization, we have moved from using the energy from biomass materials, such as dung and wood, to a reliance on fossil fuels. The need to diversify our energy supply and consumption is evident from the simple rules of supply and demand -- we're demanding more and our supply is finite. Renewables such as wind and solar power comprise approximately 1 percent to 1.5 percent of our total energy consumption. Even at an aggressive growth rate of adoption, we might see it becoming 2 percent to 3 percent of our total consumption.

The benefits of exploring and embarking into the use of renewables are technological gains for the United States. By virtue of the research and the technology created, our nation can stay a forerunner as the top technologically advanced society in the world. Many developing countries want our technological know how. Additionally, the technological spinoff from research and advancements further enhances the U.S. position in the global economy.

Understanding the evolution of embarking on new technologies can be illustrated by the learning curve experienced with wind farming. Ten years ago this energy form was relatively expensive. Today wind farms are being developed that are more economical. Regulations are being put into place and people are beginning to understand the nature of these farms. One day they will become more competitive. With the high price of oil and gas, alternatives are becoming more feasible. Perhaps we have now made it to the crossroads.

Coal is another fossil fuel with the potential for becoming a more environmentally friendly resource. The United States continues to advance clean-burning technology that helps to reduce air pollution emissions. It will become an even more important energy source for our country since we are one of the world leaders of coal reserves. Coal is the most widely used energy source for electrical power supply in the United States. It may become both one of our greatest needs and largest assets. One day coal may end up supplementing natural gas.

U.S. consumption of nuclear energy is about 8 percent of total energy consumption, and this figure is expected to drop to 5 percent by 2020. The current nuclear energy process is controversial because of radioactive nuclear waste, which can present environmental issues. The future decline in nuclear energy stems from the lack of any planned expansion of nuclear facilities at present.

Nuclear fusion is a nuclear energy process with fewer environmental risks. Great amounts of energy are released from nuclear fusion, an energy source in development since 1951. Fusion energy brings atoms together whereas the fission process breaks atoms apart. Fusion energy is the type of energy that comes from the sun. It does not require or degrade land as other energy sources, such as renewables and fossil fuels.

There are fusion research reactors in the United States and the rest of the world. One of the fuel sources for fusion energy is helium-3. It is estimated that there is ten times more energy in the helium-3 on the moon than in all of today's economically recoverable coal, oil, and natural gas on earth. Apollo missions have brought back helium-3 from the lunar surface. There is very little nuclear waste produced from using helium-3 fusion. Obviously, the transportation costs of this lunar elixir are an issue. However, fusion or other advanced energy sources may become a part of the solution in the next coming decades in addition to other renewables, which are unable to carry the whole energy load. Would this be a justification to return to the lunar surface or for the initiation of a new program in space?

Returning to earth, the alternatives for the future need to be explored and due diligence performed now. There are several directions society can take, but the needs of the people must be put first, followed by the political will to make decisions and take action. Global population growth, and thus population density issues, may further complicate matters. The overriding need, however, is to have an energy policy direction to prevent supply disruptions and the potential economic hardship to families, businesses, and the economy as a whole. The issues of energy are tightly interwoven into the operations of our daily lives, and, therefore, deserve priority recognition and attention.

This article originally appeared in the 07/01/2004 issue of Environmental Protection.

About the Author

Mark Baxter, PE, is the director of the Maguire Energy Institute at SMU's Cox School of Business in Dallas. With over 25 years of domestic and international experience in the energy industry, Baxter is a well-versed energy expert. In its 28th year, the Maguire Energy Institute encourages the study of policy, marketing, and management issues related to energy. He may be reached at (214) 768.3948.