Blog Post

Can Natural Gas Deliver the Goods to Obama’s Carbon Policy?

Jun 3, 2014 | Alan J. Krupnick

The success of President Obama's new plans for reducing carbon emissions from power plants will rest heavily on the natural gas industry. The key building block of that plan is to ramp up the use of natural gas. Before the shale gas revolution natural gas prices were a good deal higher than they are today. But shale gas and the fracking that made it possible have reduced gas prices,  inducing a frenzy of gas generator purchases and increased generation from existing gas plants. This has driven down electricity prices as well. In the process, electricity from coal has been disadvantaged. In principle, cheap gas could also hurt renewable electricity, but in many states renewables' share of the power mix is protected (and increasing) due to portfolio standards.

With the new plan, the demand for natural gas will increase even more. In the old days this would have led to big increases in costs and prices to bring that gas to market. But the shale gas revolution has changed all that. The fact that companies can put multiple wells on a given well pad very rapidly and are drilling into very rich and productive rock means that even a small increase in the price of natural gas brings forth a lot of new supply. Indeed the pace of technological change has been very high, further reducing production costs and holding prices down. Even with low prices there is so much gas that pipeline capacity is inadequate to get the gas to market resulting in shut in capacity. This will be remedied soon. An estimate we made of the costs of a plan with similar stringency to Obama's shows that the natural gas revolution can shave a $ billion off of the plan's cost.

Still, just how responsive supply will be to big increases in demand is not well understood. With plans to export lots of liquid natural gas, to use natural gas (as both a fuel and chemical feedstock) to drive a manufacturing renaissance and even to use it as a transportation fuel, the extent to which gas costs will rise is uncertain. That creates parallel uncertainty over the future price of electricity.

An even bigger concern is with natural gas as a powerful greenhouse gas. We can't very well promote natural gas as a major building block to CO2 reductions when leaky gas (termed fugitive methane) could reverse those gains. Thus it is imperative that the industry get their leaks down or conclusively demonstrate they are already low enough.