US Energy: Myths, Realities and The Two Elephants in the Room

Written by Elliott Morss, Morss Global Finance

Introduction

The media dutifully reports every info snippet they get on US energy. So we hear:

• horizontal fracking for natural gas will open up vast new energy supplies; but
• horizontal fracking will threaten water supplies;
• nuclear energy should be phased out – too dangerous;
• energy independence via “green” sources is in reach;
• all-electric autos are the future;
• coal should be phased out – it is both dangerous to mine and contributes more than any other energy source to global warming.

So let’s look at each of these claims – with numbers. As background, consider first US fuel consumption. Taken together, fossil fuels are by far the largest source of US energy. Oil, now used primarily for transport is the largest single energy source. Renewables have grown most rapidly since 1990, but it is still is supplying only 2% of the total.

Table 1. – US Energy Consumption

Sources: BP Statistical Review of World Energy June 2013 and US Energy Information Administration.

With this information in hand, the “media” mentioned above are addressed.

How Significant Is Horizontal Hydraulic Fracturing as a Source of New Energy?

Newly discovered oil and gas in shale add a substantial share to global and natural gas resources. The US Energy Information Administration concludes:

• Recently identified shale oil resources add approximately 11 percent to the 3,012 billion barrels of nonshale oil resources.
• Recently identified shale gas resources add approximately 47 percent to the 15,583 trillion cubic feet of recoverable natural gas resources.
• Globally, 32 percent of the total estimated natural gas resources are in shale formations, while 10 percent of estimated oil resources are in shale or tight formation;
• For the US, shale oil and gas discoveries add 35% and 38% respectively to oil and gas reserves.

This information is summarized in Table 2. Clearly, these discoveries are significant.

Table 2. – Contribution of Shale Oil and Gas Discoveries

Source: US Energy Information Administration

There is a growing awareness and concern over having enough clean water. So concerns that fracking will threaten water supplies is legitimate. If one major water supply is contaminated by fracking, it will be delayed for an extended period of time – just look at what happened to nuclear following the Fukushima disaster.

But keep in mind: – the world is engaged in a frantic search for more energy. Risks must be taken. And more lives will be lost. That said, what about nuclear?

Nuclear Energy Should Be Phased Out – Too Dangerous

Keep in mind that the world is engaged in a frenzied search for more energy. Recognize further that all forms of energy entail risks: we hear regularly of coal and oil mining deaths. And despite the recent tragedy in Japan (probably not a good idea to locate nuclear plants in earthquake-prone areas), a lot has been learned in recent years about home to manage nuclear plants safely.

And the use of nuclear energy does not contribute to global warming. Many do not realize that the US is the largest nuclear fuel producer in the world. France generates about half as much with Japan third. As Table 1 indicates, 8% of US energy is produced by nuclear plants. And with the growing pressure to reduce use of coal (about 40% of US electricity is generated by coal plants), this is probably not the time to reduce nuclear use.

Energy Independence via “Green” Sources is in Reach

To address this comment, I define “energy independence” as meaning the US imports little or no energy. I define “Green” energies as solar, wind, geothermal, and biomass (ethanol). Oil is the primary energy that the US imports, and Table 3 provides data on US oil production, consumption, and imports. US oil “dependency” peaked in 2006 at 65%. It has fallen back since then but is still since then but it still exceeds 50%.

Table 3. – US Oil Production, Consumption and Imports
Million Tons Oil Equivalents (MTOEs)

Source: BP Statistical Review of World Energy June 2013

So is there a chance “green” energies can end this dependency? Table 4 presents data on “Green” energy consumption in the US.

Table 4. – US “Green” Energy Consumption

Source: BP Statistical Review of World Energy June 2013

Total “Green” energy production is only 30% of oil imports. It will be some time before “Green” energy eliminates the US dependency on oil imports.  

All-Electric Autos Are the Future

Many do not realize it takes energy to make electricity. There is a 60% energy loss in generating electricity: that mean to produce 100 MTOEs of electricity, it takes 167 MTOE’s of other fuels.  And making electricity generates CO₂ emissions if coal, oil, or natural gas is used.

So how much CO₂ is generated by making electricity from coal, oil, and natural gas? According to the International Energy Agency (IEA), the emission coefficients for coal, oil and natural gas are 965, 635, and 400, respectively. These coefficients measure the tons of CO₂ emissions per unit of energy (terajoules) generated. Note that even with natural gas, CO₂ emissions are significant. It turns out that in 2012, emissions from making electricity constituted 32% of total US emissions. In short, most US electricity is a “dirty” fuel.

In another piece, I asked whether it would not be better if autos were fueled by natural gas rather than electricity. After all, this would avoid the energy lost in making electricity. It turns out that, electric engines are more efficient in converting electricity to power than natural gas engines are in the gas to power conversion, enough so to neutralize the efficiency gain from using natural gas directly. But work is ongoing to make engines run on natural gas more efficient…. So the response to the assertion in the header is that all electric cars should not be the future because of energy losses in making electricity and the resulting CO₂ emissions. Things could change: all-electric autos might not be the future.

Coal Should Be Phased Out – Elephants in Room

Coal mining is dangerous and coal, per unit of energy generated, creates more emissions than any other significant energy source. BUT, let me introduce the two elephants in the room: China and India. Table 5 provides data on coal and oil consumption since 1990. Note China and India. China went by the US several years back and is still growing. India is only now starting its consumption growth. The growing coal and oil demands from these two countries guarantee that global warming will increase for many years to come.

Table 5. – Growth in Coal and Oil Consumption, 1990 – 2012
(MTOEs)

Source: BP Statistical Review of World Energy

This conclusion is confirmed by data on Carbon Emissions presented in Table 6.

Table 6. – CO₂ Emissions (mil tonnes)

Source: BP Statistical Review of World Energy

Conclusions

New technologies are causing significant changes almost everywhere, including energy. What does the future hold? Will ways be found to store electricity more efficiently, thereby giving renewables a real boost? Will new fuels discoveries continue? Will fracking lead to the contamination of a major water supply? We must wait and watch.

But there are some certainties:

• Both China and India will use more coal and oil. That means CO₂ emissions will increase, whatever the US and Europe do to reduce them. Consequently, the world should prepare for changing climates and more violent weather.
• Oil companies remain “well-positioned”. They have plenty of cash. They will be major beneficiaries of the new natural gas discoveries. And rest assured, they will manage oil and gas prices so investments in renewables remain chancy at best. Too bad we can’t invest in Saudi Aramco, Gazprom, or the National Iranian Oil Company, the three largest oil companies in the world. ExxonMobil (XOM), PetroChina (PTR), BP (BP), and Royal Dutch Shell (RDS-A) will just have to do. Or you might prefer an oil company ETF, like (VDE) or (IXC).