energy conservation will become the primary concern

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ENERGY CONSERVATION WILL BECOME THE PRIMARY CONCERN FOR UNITED STATES INDUSTRY

Bruce LaCour, P.E. Mech. Engr.December, 2015

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The Short History of the Energy Conservation Movement or The Lack of It

• Thomas Malthus – 1798 – Writes an Essay on the Principle of Population and established the concept of Earth’s resource limits being taxed by a uncontrolled population growth.

• By the late 1950s, the U.S. is recovering from WWII and building a growing petrochemical industry while most of the rest of the developed world tries to recover from various levels of destruction. Uncle Sam has a distinct advantage, at least for a while.

• M. King Hubbert - 1956 – Presents a paper to API predicting that production of oil from conventional sources would peak in the continental United States around 1965-1970 period.

• In 1960, Jack Kennedy is elected President of the U.S. In September 1962. Kennedy gives his “We choose to go to the Moon” speech.

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• Kennedy is assassinated in November 1963, and Johnson takes over. Now we choose to go to the moon and fight the Vietnam War at the same time. This ends any idea of fiscal responsibility that any President might have. It also eliminates any concern about the limits of anything, much less natural resources.

• In July 1969, Apollo 11 lands on the moon for the first time. By 1973, the U.S. involvement in Vietnam has ended and so has the Apollo space program with the last flight in December 1972 after an tremendous expenditure of money and human resources.

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• Conventional oil production in the lower 48 U.S. states peaks around September 1970.

• The Limits to Growth is published. The 1972 book is about the computer simulation of exponential economic and population growth with finite resource supplies. Two of the three scenarios predicted “overshoot and collapse” by mid to latter part of the 21st century. The book has been ridiculed by mainstream economists ever since.

• The 1973 Oil crisis begins in October 1973 when OPEC proclaims an oil embargo. By the end of March 1974, the price of oil has risen from $3 per barrel to nearly $12. This is a response to United States support of Israel in the 1973 Yom Kippur War. Long lines at the gas stations start to appear.

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• In 1970, U.S. natural gas production hits a peak that is not reached again until 2010 with the “Shale Gas Revolution”.

• In 1970, natural gas curtailments become a problem and get progressively worse through 1975. The problem is due to natural gas price regulation that has stymied natural gas exploration and production since the mid 1950s. We won’t let that happen again no matter how much debt the federal government and individual companies have to assume!

• The second, more severe, oil shock begins in 1979. This time crude oil price nearly doubles and long lines at the gas stations reappear. Oil users then create a natural gas shortage due to the switch from oil to natural gas, which also becomes a problem.

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• The oil price peaks in 1981 and starts falling again causing the demand for natural gas to drop and putting pressure on natural gas pipelines that had turned to “take or pay” contracts.

• By mid 1970s to the late 1980s, nuclear energy becomes the “new solution” to the problem of human energy consumption. The 1979 Three-Mile Island incident causes some movies for Hollywood to create, but to some in this country and some in other countries nuclear energy is still the answer to maintaining uncontrolled human population growth.

• The 1990s, except for a little slowdown in 1990 to 1992, is a period of growth with little concern about energy conservation. Plus the internet is supposed to be the less energy intensive new future!

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• Natural gas discoveries and pipeline infrastructure around the world start to make the U.S. “Basic Chemicals” industry less competitive in the 1990s. Many Ammonia and Methanol plants are shutdown by 2005.

• The term “Peak Oil” is popularized in 2002 by Colin Campbell and Kjell Aleklett, one a geologist and the other a Physics professor, and they form The Association for the Study of Peak Oil.

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• Natural gas is abundant and relatively low cost from 1990 to 2002. This causes many utilities to switch from coal to natural gas and add peaking natural gas electricity generating plants. Some petrochemical plants install cogeneration facilities. The idea to generate your own electricity becomes popular, and is growing in popularity ever since. However, whoever generates the electricity still needs low cost natural gas.

• By 2003, the price of natural gas is increasing rapidly and U.S. methanol and ammonia production is being replaced by ammonia and methanol plants in Trinidad. Other places like Chile, Egypt, Qatar, Indonesia, and China are starting to provide increased competition to the natural-gas based petrochemical industry.

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• The reason for the movement of the basic chemicals industry outside the U.S. from 1995 to 2005 is that profitability of these plants depends heavily on the price of natural gas which represents over 50% of the total cost of goods sold, less depreciation. So you build where the price of natural gas is lowest and the supply is most secure at this low price.

• In 2006 the “Shale Gas” craze begins. Natural gas drilling starts to increase significantly in Barnett and later in Fayetteville and Haynesville plays in response to the rising natural gas price. The “New Petrochemical Age” has begun in the United States!!!! What has really begun is the third economic bubble in a row and all bubbles burst eventually.

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• Shale gas drilling drops dramatically in 2008 and drops further in 2009 in response to the falling natural gas price caused by the bursting of the second economic bubble and overproduction of shale gas. At this time, a significant number of gas wells have been drilled and capped waiting for the rise of the natural gas price. They are still waiting.

• In 2008, the Chairman of the Republican National Committee coins the campaign slogan “Drill, Baby, Drill, which is used later by Sarah Palin. In other words, more drilling is the answer to achieving U.S. “energy independence”. Don’t worry if you don’t make a profit because Wall Street will keep the money flowing as long as the Federal Reserve does.

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• In 2009, natural gas production starts to skyrocket in the Haynesville play and six months later in the Marcellus play. By late 2011, production in the Haynesville play peaks. The other large natural gas plays, Barnett, Woodford, and Fayetteville peak about the same time. By early 2013, Marcellus is the only major shale gas play that has not peaked.

• One project after another is being announced for the Marcellus play, but many local residents question the benefit to them. New York state later bans hydraulic fracking. Later Hollywood captures the mood with the movie “Promised Land”.

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• In 2011, the Eagle Ford play begins producing significant quantities of very light crude oil. It joins the Bakken play, which begin to ramp up in 2005, as the two major tight oil production plays in the United States.

• In its Annual Energy Outlook for 2011, the US Energy Information Administration (EIA) more than doubles its estimate of technically recoverable shale gas reserves in US to 827 trillion cubic feet from 353 trillion cubic feet. In the 2012 Outlook, the estimate is lowered back down to 482 trillion cubic feet in one of many gross overestimates followed by estimate downward corrections the EIA continues to make.

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• On March 11, 2011, Fukushima Nuclear Power Plant in Japan experiences a nuclear disaster worst than the Three Mile Island incident. Three of the plant nuclear reactors melt down. Although no short term radiation fatalities were reported, some 300,000 people evacuate the area. This situation has not been resolved and continues to worsen.

• In the months after, U.S. citizens on the west coast are concerned about the amount of radiation that will reach shore. They are still concerned.

• In the aftermath, Germany accelerates plans to close its nuclear reactors and decides to phase the rest out by 2022.

• The loss of 30% of the Japan’s generating capacity leads to much greater reliance on LNG and coal.

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• The International Energy Agency (IEA) predicts in its World Energy Outlook (WEO) 2013 that the United States will be the number one producer of crude oil in 2017.

• The IEA in the WEO 2013 also predicts that in 2035 fossil fuels will remain the major fuels on which the world relies supplying 76 percent of primary energy demand.

• In February 2013, one of the many independent analysts trying to bring sensibility and accurate statistics to the tight oil-shale gas craze, J. David Hughes, publishes “Drill, Baby, Drill”( a play on the Republican moto) through the Post Carbon Institute web site. The report is a critical analysis of shale gas and shale oil (tight oil) and the realistic potential of a shale revolution.

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• The EIA’s Annual Energy Outlook 2014 states that the potential U.S. oil and gas resource bases are increasing, not decreasing. More sensible forecasters, like J. David Hughes and Art Berman and others, insist those estimates are way-off. They remind the readers of the Energy Outlook 2011 overestimate of total U.S. technically recoverable U.S. reserves and the recent downgrade of the Monterey play total recoverable reserves from 13.7 billion barrels to 600 million barrels, a 96% reduction.

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• British Petroleum issues its annual BP Statistical Review of World Energy in June 2014. U.S. Oil production increased 13.5% in 2013 over 2012. U.S. oil consumption only increased 2.0%. Saudi Arabia’s production decreased 1.1%. Total world production increased only 0.6%. Total world consumption increased only 1.5% Who’s overproducing oil?

• The report shows that the U.S. consumes 19.9% and China 12.1% of total world crude oil consumption. China’s catching up with Uncle Sam fast and the competition for the world’s crude oil supply is increasing.

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• In December 2013, J. David Hughes publishes “Drilling California: A Reality Check on the Monterey Shale” that has empirical analysis of actual oil production data from the Monterey Formation. In this report Hughes predicts earlier what EIA later admits to about the overestimated recoverable reserves.

• In October 2014, J. David Hughes publishes “Drilling Deeper” in which he investigates the Department of Energy’s expectation of long-term domestic oil and natural gas. Why not overestimate without any hard data if the public continues to buy it and “investors” continue to invest based on these estimates?

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• By mid 2013, one announcement after another for the Gulf Coast area of Louisiana and Texas is being made for new facilities based on “long-lasting” low natural gas prices based on enormous reserves. By 2014, at least five export LNG plants are announced and several methanol plants. Announcements for new ammonia plants are popping up all over the United States. Two Chinese-financed methanol plants are even announced for the west coast of the United States.

• Some are calling for a “new petrochemical age” in the U.S. Shale gas to do wonders! Many who have been studying the potential supply situation in detail say this is short-lived.

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• By January 2015, the oil price is staying below $50 a barrel and one oil and gas operation after another is announcing capital spending cutbacks and labor reductions. Articles are being written about the danger of spreading economic disaster due to junk bonds associated with the “shale revolution”.

• As the price of oil slides down the slippery slope, the Saudis make it clear they will not bail out Uncle Sam as usual by cutting back their production. It becomes clear they intend to kill the small players in the U.S. shale oil industry in order to maintain their U.S. market share long term.

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• British Petroleum issues its annual BP Statistical Review of World Energy in the summer of 2015. U.S. Oil production increases 15.9% in 2014 over 2013. U.S. oil consumption only increases 0.5%. Saudi Arabia’s production increases only 0.9%. Total world production increases 2.3% due mainly to U.S. and Canadian production increases. Total world consumption increases only 0.8%. The U.S. continues to overproduce unprofitable shale oil. This is the reason the producers are trying to lift the ban on oil exports.

• On January 15, 2015, Saudi billionaire businessman Prince Alwaleed bin Talal tells Maria Bartiromo In an interview that “we will not see $100-a-barrel oil again.”

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• The more accurate statement about the present situation was made in 2003 by former Saudi Oil Minister, Sheik Ahmed Zaki Yamani: “The Stone Age came to an end not for a lack of stones, and the oil age will end, but not for a lack of oil”.

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U.S. Industry Must take The Lead in Energy Conservation

• While the proponents of the “new petrochemical age” and the advocates for a continuance of the past based on extremely expensive, and as yet uncommercial, biochemicals technology clash, the United States is headed for an energy crisis sometime in the next decade (maybe sooner) that can only be averted by a massive energy conservation program. Few will accept this until it too late.

• The American public is being totally fooled by the recent low gasoline prices and are generally accepting that nothing will change drastically anytime soon. Both political parties continue to push the idea that the American dream is still alive provided they are in control and the past way of life will continue unabated. It will take a crisis to change that attitude.

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U.S. Industry Must take The Lead in Energy Conservation

• An industrial operator can’t afford to wait for a crisis to prepare for much higher energy costs. The next decade will be a fight for survival and only the most cost efficient will survive.

• Operating costs will increase without increases in revenues. Profit margins may shrink significantly. Energy conservation will be the number one driver of capital expenditures, not increased production. “Lean Manufacturing” will be more than the latest buzzwords.

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The Future Rise in the Natural Gas Will Force The Movement in Energy Conservation

• The price of natural gas is the primary mover of the U.S. petrochemical industry. It is the feedstock for all these recently announced ammonia and methanol plants. The many announcements of new ethylene facilities also depend on the primary of component of natural gas liquids, ethane. So the domestic production levels of natural gas and the resulting demand versus supply curves which determine the equilibrium price are extremely important to the sustainability of these plants.

• Natural gas also determines the cost of power in these plants, which is the second highest component of operating cost and which has an immediate affect on the profitability of individual facilities.

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• 2016 and possibly some of 2017 will experience deflation due to the economic slowdown that is inevitable due to many years of overbuilding that the Federal Reserve low interest policy has attempted to maintain. The only thing that this policy has accomplished since Greenspan started it in the early last decade is two more bubbles in a row – the sub-prime mortgage bubble and the tight oil-shale gas bubble. The last one is slowly deflating and could just bust wide open any day with similar immediate financial problems to the last bubble bursting in 2008. This will result in unprecedented debt destruction and further reductions in the demand for everything. The result is deflation, but the Fed sometime in 2016 probably in concert

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• with the IMF, will again foolishly attempt to halt the inevitable economic recession (depression?) with direct contributions to the American consumer.

• This foolish combination of trying to prop up a failing economy combined with China, Russia, and Saudi Arabia’s movement to reduce the influence of the “American Dollar” will cause the start of massive inflation in the United States.

• Industry will now experience decreasing demand and increasing energy prices which will reduce profit margins significantly and rapidly.

• The next presentation will discuss the many pressures on natural gas supply that will shift the supply curve upward and

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• and to the left to establish a new higher natural gas equilibrium price. The immediate affect will have the demand curve shift upward and to the right to maintain consumption levels, since many will not go out of business immediately, and will cause the equilibrium price to rise even higher. Eventually the higher and higher natural gas prices will cause some plants to shutdown similar to late 1990s and early 2000s. The natural gas price may even reach levels in early next decade that cause Congress to rethink LNG export, just like they now prohibit domestic crude oil export.

energy conservation will become the primary concern

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