MIT Gas Report Glosses Over Both Price and Security Risks

By Frank Clemente, Ph.D., EnergyFacts.org

In June, a group of MIT researchers released a report on “The Future of Natural Gas, June 2010”. The basic thrust of the report is that the production of large amounts of shale gas at very modest prices will allow for the significant expansion of gas consumption — especially for power generation in the United States. Unfortunately, the natural gas industry provided the money to write the report. While this alone doesn’t invalidate the work, it certainly suggests that any flaws might be those of omission rather than commission.

Put another way, the MIT group presented a risk-benefit analysis of natural gas but left the risk section to someone else. In an earlier issue of Energy Facts, we showed how the report gave surprisingly short shrift to the increasingly apparent environmental impacts of shale gas production. In last week’s edition we examined yet another key omission in the report — natural gas price volatility and its impact on families and businesses. This week we will focus on how the MIT group generally bypassed any substantive discussion of why increased dependence upon gas for electricity elevates the risk of both higher energy prices and inadequate supply.

No sentence is more telling in the MIT report than the following recommendation: “Coal generation displacement with NGCC generation should be pursued as a near-term option…” Both electricity and natural gas consumers should take heed. Over 90% of power plants built since 2000 have been gas-based. Unfortunately, we already know what that increased natural gas generation did to electricity prices:

More Natural Gas Generation Leads to Higher Electricity Prices

“The rising price of natural gas is one of the reasons why Southern California Edison, the largest utility in California, recently warned customers it would be requesting a sharp increase in rates.”
Christian Science Monitor (2)

But increased gas-based generation does not merely raise the cost of electricity. It also raises the price of gas for other consumers. During the past decade gas prices have not only averaged four times higher than coal prices but were far more volatile.

Further, the MIT recommendation would put electricity reliability at serious risk. The group legally mandated to assess electricity adequacy, the North American Electric Reliability Corporation (NERC), has warned “Continued high levels of dependence on natural gas for electricity generation in Florida, Texas, the Northeast, and Southern California have increased the bulk power system’s exposure to interruptions in fuel supply and delivery.” (3)

And Regarding National Energy Security:
While the MIT report briefly states that gas relates to national energy security issues, absolutely no analysis is presented as to what the consequences would be if, after developing an ever-increasing number of natural gas power plants in the United States, we simply just do not have enough domestically produced gas and have to import it in the form of liquefied natural gas (LNG). The National Energy Technology Laboratory has described that very likely scenario: “… The need for more LNG will create closer links to the world oil price, setting the stage for the marginal price of electricity to be set by the whims of foreign oil/LNG suppliers, for the first time in U.S. history.”
A Five Nation Cartel Would Control Almost 60% of the World’s Natural Gas

“Russia and Qatar [are] exploring possible means of adjusting their gas sales strategies to avoid head-to-head competition that could undermine the oil-indexed pricing both still support for their baseload long-term sales. … aiming to come up with a strategy to minimize price competition out to 2025.” (Energy Intelligence Report, March 2010)

“We are creating something similar to OPEC but with gas.”
—Hugo Chavez on the formation of a gas cartel

The Globalization of Natural Gas Prices:
LNG prices will be linked to oil prices over coming decades

“Our [LNG] projects are long term [and] linked to oil prices… in the coming two or three years there will be a shortage of gas.”
—Mohammed al Sada, Qatari Minister of Energy, March 2010 (Reuters, March 26, 2010)

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