The Clean Air Act to the Climate Rescue?

President Obama and Governor Romney are making their final push for the White House, talking up their economic, energy, and foreign policy plans. But one issue is getting the silent treatment this year: climate. You’ll probably hear more about the tired memes of Big Bird, Binders of Women, and Horses and Bayonets in the final weeks than you’ll hear about the climate.  Frontline aired a great piece 

the other night about how climate has gone from a key political issue in 2008 to untouchable in 2012.  Regardless of climate policy getting the cold shoulder, researchers will continue studying potential impacts, risks, and explore policy solutions.

This week Resources for the Future (RFF) released an interesting discussion paper by Dallas Burtraw and Matt Woerman that found the US is nearly on pace to meet its pledge to reduce greenhouse gas (GHG) emissions by 17 percent from 2005 levels, despite lacking comprehensive climate policy.  In fact, the authors found that if the US adopted the 2010 Waxman-Markey climate bill, emissions would have only declined 13.6 percent by 2020.  I’ll go out on a limb and say climate policy opponents are loading that finding into their arsenal in case momentum builds for climate legislation again.  Regardless, the paper – “US Status on Climate Change Mitigation” – is an insightful and thought-provoking read (ok, maybe if you are an energy/climate econ wonk).

Michael Levi from the Center on Foreign Relations commented on the paper over at his blog, and I share his curiosity about the paper, as well as his skepticism. 

RFF found that the greenhouse gas (GHG) reduction measures in the Clean Air Act (CAA) will account for about 10 percent of the 16.3 percent emissions reductions by 2020. Waxman-Markey would have also reduced emissions, but not as much as the CAA alone according to the RFF paper. Additionally, the Waxman-Markey bill would have preempted CAA measures, thus leading to higher emissions than our current trajectory.  I am skeptical, however, of the CAA’s ability to regulate GHG emissions from existing stationary sources (e.g., power plants, refineries) and significantly reduce emissions.

For one, the CAA’s existing stationary sources standard is not yet finalized, and it is unknown what the standard may even look like (or if it's perpetually delayed). In regards to the political uncertainty surrounding the regulation, Levi writes in his blog, “[W]hether you think emissions would have been higher or lower under Waxman-Markey depends fundamentally on what you think the prospects for regulation of stationary sources (particularly existing ones) under the CAA are. This is almost entirely a matter of political, rather than economic, projection.”

I’m staying away from political projections, but I will walk through why I believe one CAA proposal being considered won’t result in emissions reductions – and may actually increase carbon emissions. 

In proposed rulemaking, the EPA noted that existing power plants could achieve modest efficiency improvements of about 2-5 percent, which, as cited in the RFF paper, results in a comparable reduction in emissions without changing electricity output from the facilities.  The problem is electricity output would change at plants that improve their efficiency.  Their production would increase because of what economists call the “rebound effect.”

The rebound effect is a phenomenon in which energy savings from efficiency gains are offset by increases in consumption. The RFF paper reviews the rebound effect in regards to Waxman-Markey, but the same principle holds true for the potential CAA standard.

To improve the efficiency by 2-5 percent, coal-fired power plants would need to install new equipment like fans and turbines. The upgrades not only improve the unit’s heat rate[1]  - and therefore make the unit cheaper to operate – but new turbines can increase the capacity of the unit. The table below shows a simple hypothetical example of the efficiency gains, cost reductions, and CO₂ emissions at a 100 MW coal plant, before and after efficiency upgrades.

Prior to the upgrade, the 100 MW plant has a 10 MMBTU/MWh heat rate.  Assume that it consumes coal at a cost of $3.50/MMBTU, resulting in a production cost of $35/MWh and an annual capacity factor of 60 percent. The plant would emit 538,740 tons of CO₂ per year (Column 2 in table).   If a new turbine is installed (Column 3) and improves the heat rate by 5 percent, the production cost falls to $33.25/MWh. The lower production costs means the unit moves down the supply curve and  likely dispatches more often. So assume the capacity factor increases modestly to 63 percent. The annual CO₂ emissions are 537,393 tons in this scenario – a reduction of only 0.25 percent from the “Prior to Upgrade” scenario.  

As I mentioned earlier, new turbines also increase the capacity of units. Let’s assume the new turbine improves the heat rate by 5 percent and adds 3 megawatts of capacity, while keeping the capacity factor steady at 63% (Column 4). The CO₂ emissions in this scenario increase above the “Prior to Upgrade” scenario by 2.7 percent, leading to annual emissions of 553,515 tons.

In my opinion, mandating efficiency upgrades at coal-fired power plants is not a particularly attractive option for emissions reductions, and may actually increase emissions in some cases.  I don’t have an answer as to what a GHG standard for existing sources might look like under the CAA. However, I do believe a mechanism like cap and trade that increases the marginal costs of production for high-emitting sources  – rather than decreasing their costs like efficiency gains – is a more efficient policy option for reducing emissions in the long-run.

This is not meant to take away from the RFF report – I think it is a valuable piece of research. Moreover, I think we need more critical research like it. That way we can understand the complex interactions and ensure we achieve the policy goal of GHG reductions in an economically efficient manner. That is, of course, if any politician still has that goal…

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[1] Heat rate is the measure of a unit's efficiency of converting fuel into electricity.

Power Plant Emissions Down Despite Court Ruling

The coal industry is having a rough year, but it seemed to got a reprieve when the a federal appeals
court overturned the EPA’s Cross State Air Pollution Rule (CSAPR). The rule required reductions of power plant emissions that contribute to ozone  and fine particle pollution.

The coal industry cheered the court’s decision while environmental groups panned it Me? I say, “meh.”

I say “meh” and “seemed to get a reprieve” because I spent several months analyzing CSAPR and potential compliance strategies. After some restless nights induced by national hysteria over the rule’s short compliance period, I concluded that complying with the rule was not a big deal. Compliance would
require operational changes such as shifting generation towards lowering emitting units like renewables
or natural gas units. For the most part, coal plants would not require environmental control retrofits,
nor would they be retired. There would be little to no price impact for electricity consumers. Moreover, it became clear those operational changes (and therefore emission reductions) were bound to happen – with or without CSAPR – because of falling natural gas prices.

As natural gas prices fall, gas-fired power plants become cheaper to operate than higher emitting coal
units. Given the steep decline in gas prices, grid operators have therefore shifted generation from coal-
fired power plants to those consuming natural gas. This has led to significant emissions reductions as
seen in recent EPA emissions data – despite the court overturning CSAPR.

The year-over-year reductions for the first half of 2012 are remarkable. For over 450 coal-fired units
included in the EPA’s dataset:

Coal-fired SO2 emissions fell 34% 

Coal-fired NOX emissions declined 24% 

A portion of the reduction is due to installation of environmental controls at some coal-fired power
plants (the SO2 emissions rate in lbs/MMBTU fell 17%, while the NOX emissions rate fell 5%). Most of the reduction, however, is due to natural gas power plants displacing coal-generation. The fuel switching is evident in the EPA’s coal burn data. During the first half of 2012, 20% less coal was consumed than the first half of 2011, a reduction of over 76 million tons of coal. That is equal to 694,000 railcars of coal, which would span over 7,200 miles.

So despite the coverage of CSAPR and the court's ruling, power plant emissions continue to decline.  The declines will likely continue as natural gas prices remain low and coal-fired power plants install controls or retire to comply with EPA's Mercury and Air Toxics Standards.

For a Friend

Note: A hectic summer has prevented me from using this space as much as I would have liked, and I hope to pick back up in the coming weeks. Today I am casting energy issues aside, and I write for a friend – one of the best in the energy business – and for his family.

Last Friday night my friends and I went out to the Washington Nats game to catch up before one friend shipped off to Africa for a year.  We had a great time and shared many good laughs as we usually do, but it ended up being a night we’ll never forget, and one that will ultimately make us stronger.

We grabbed drinks after the game and I headed home around 10:45. My friends stayed out a little while longer before calling it a night. As my friend Thomas “TC” Maslin made his short walk home to his wife and son, he was assaulted and left in critical condition.

Those who know me know I prefer keeping my emotions private – like many guys do.  I will say that it has been an exhausting and emotional week. Knowing what could have happened to him, however, has made it a week I am grateful for.

TC on Mt LeConte 

TC has a beautiful wife and son, and an unbelievably strong family. Friends and the community are rallying around them, and the display of strength TC and his family are showing is inspiring – and not at all surprising.

Among our friends, he is the paragon. I liked to joke with TC that it was good for us unmarried guys to have him around because it was comforting to know that at least one us had life figured out. 

TC is also full of humility. He’ll never admit it, but he’s one of the brightest solar energy minds out there.  The only time we knew he was quoted in the New York Times or Bloomberg was when we stumbled upon it ourselves.  

I was reading an energy book a few months ago and flipped to the back of the book to look up a citation. There was TC’s name.  I took a picture of it and sent it to our friends, because if he wasn’t going to brag about it, I was happy to do it for him. (He’ll probably shake his head when he reads this post… sorry TC!)

TC and his family mean a lot to my friends and I. We want to ensure they get the best medical care and support they deserve during the recovery process, so we’ve set up this donation site to help: http://www.simpleregistry.com/loveforthemaslins/

The Gassy Electric Sector

Last week I was in Portland, Oregon for the National Association of Regulatory Commissioners (NARUC) summer conference.  I was fortunate enough to land on the agenda several times to discuss my recent report, asses the interdependence of natural gas and electricity, and to provide a natural gas market update.  It was a great trip despite foregoing a brewcycle endeavor in favor of a business dinner.  

Putting my suds-less induced sorrows aside, it is quite remarkable how natural gas has changed our energy landscape in a few short years. Here are the highlights of my natural gas market update.

Natural gas is an important fuel for the nation. It heats homes, is used in industrial processes (like creating chemicals and fertilizers), and fuels electric power plants.  Domestic production of natural gas was stagnant between 1997 and 2007, which led to rising prices (see graph below – also note the impact Hurricanes Katrina and Rita had on production and prices in 2005). Around 2007, gas producers began unlocking vast natural gas reserves in shale formations and because of the widespread use of hydraulic fracturing [1] and production has been soaring since.

On the consumption side of the equation, total natural gas demand was relatively flat between 1997-2007. Despite the recession beginning in 2008, natural gas usage has increased since 2007 because of lower fuel prices.  The electric sector is driving the growth (see graph below). In comparison, demand from the commercial and residential sectors has been constant the past 15 years, while industrial consumption steadily decline. In 1997, the electric sector trialed the residential and industrial sectors in gas demand, but in 2011 the electric sector was the largest consumer of natural gas, accounting for 34% of demand. 

So what’s behind the electric sector’s growing gas appetite?  One reason is there is a growing number of gas-fired power plants.  But the primary reason is power plant dispatch economics are causing higher utilization rates of natural gas-fired power plants.

Electric system operators dispatch power plants based on variable production costs, have the goal of cost minimization.  Variable production costs for power plants include fuel, emissions allowances, and variable operations and maintenance. The capital costs to build power plants are not considered in the dispatch equation ( i.e., those costs are sunk).  To minimize costs, operators dispatch the lowest cost units first, and then more expensive units as electricity demand grows.  

For many years power plants dispatched in a predictable order.  Operators would dispatch – from lowest to highest cost – baseload hydro (because it has no fuel cost!), then nuclear, coal, natural gas, and finally oil-fired plants. (I’ll discuss how wind and solar are handled in a separate post).  Decade low natural gas prices has shuffled that order.

Many natural gas plants are now displacing coal plants in dispatch, resulting in higher utilization of gas units and lower output from coal units (which can lead to coal unit retirements). 

I calculated illustrative production costs for a few different types of power plants in the table below.  Based on current fuel prices, natural gas combined cycles (CC) produce electricity for about $25.5/MWh.  That puts CCs near price parity with units burning some of the nation’s cheapest coal from the Powder River Basin (PRB), especially PRB units east of the Mississippi River where rail shipping costs can be up to 75% of PRB’s delivered cost.  The picture is bleaker for coal units using coal from Central Appalachia (CAPP).  Gas-fired CC units are about $12/MWh cheaper than units burning CAPP.

On a national level, the pace and scale of fuel-switching from coal to gas has been remarkable. In 2008, coal produced 48% of the nation's electricity, while natural gas produced 21%. In 2011, coal's share slipped to 42% and natural gas generation rose to 25%.  Then in April 2012, coal and natural gas generation were equal for the first time, with each fuel producing 32% of the nation's electricity (see graph below).

With the electric sector becoming so gassy, I’m sure coal plant operators are hoping the industry gets a dose of Beano.* 

*Sadly I am not an heir to Beano fortunes.  Nor am I related to THE Mr. Bean, but I will answer by the name.

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[1] Shales are geologically poor reservoirs because they have low porosity (gaps in the formation to hold gas), and low permeability (the connection of pores to allow the flow of gas).  Hydraulic fracturing increases the permeability by cracking the rocks with high-pressure water, lubricants and materials like sand.  The practice unlocked vast reserves of natural gas, and production soared while prices steadily fell. 

Why King Coal Isn't Dead

The hits keep on coming for the coal industry since my post earlier this week about the “War on Coal”. On Wednesday the Senate voted down Senator James Inhofe’s resolution to scrap the Environmental Protection Agency’s (EPA) Mercury and Air Toxics Standard, by a vote of 46 yes to 53 no.   

Perhaps the biggest and most surprising news from the Senate's deliberations was a speech by Senator Rockefeller.  The Democrat from West Virginia rebuked the coal industry he represents, and told them to "face reality" rather than blame their troubles on EPA.  It was a powerful, honest speech that you should check out if you have 15 minutes to spare (or check out his editorial). 

The bad news continued for the coal industry on Thursday, as Arch Coal announced 750 job cuts in Appalachia because of lower demand for coal-based electricity.  In other words, it was a decision based on the current comparative economics between coal- and natural gas-fired generation. 

So with all this bad news for coal, is King Coal really dead? Or did natural gas put him on life support and the new EPA rules are the coup de grace.

As I mentioned in my previous post, the proclamations of coal's death - imminent or otherwise - because of natural gas prices and regulations, are overblown.  Coal will remain a significant contributor to our nation's electricity mix for the next 10-20 years. Here's why:

Most of the coal-fired power plants scheduled for retirement in the next five years are older, smaller and inefficient.  That combination makes it harder for utility planners to justify spending millions of dollars on environmental controls to maintain unit operation.  SNL Financial is reporting that announced retirements for 2012-2016 total roughly 21,000 megawatts (MW).  In the scatterplot below, you can see that most of the retiring units are below 300 MW and were built 50 or more years ago.

Many of the plants do not operate at high utilization rates. In total, the retiring units produced just 5% of the total 2011 coal-fired electricity, or approximately 2% of all electricity in 2011.  Not an overwhelming amount.  The real work-horses of the coal fleet are the newer and larger units.  Most of these units already have environmental controls because the units are more efficient and the economies of scale for environmental controls make the projects economically justifiable.  The larger coal plants produce the brunt of coal-fired generation, and will continue to operate in the next 10-20 years.

Just how much coal capacity will remain? The Energy Information Administration’s (EIA) estimates in its Annual Energy Outlook 2012 Early Release takes into account approximately 21,000 MW of coal retirements and estimates that 288,000 MW of coal will remain operational in 2015. 

Historically, EIA’s estimates are conservative and often criticized as such. If we assume 70,000 MW of total coal retirements, as estimated this week by ICF, that leaves us with roughly 240,000 MW of operational coal plants.  That is more than any other type of generation plant. As a comparison, EIA estimates the 2015 natural gas combined cycle capacity at roughly187,000 MW.

Here are some quick back-of-the-envelope calculations showing why coal will still be a significant player in the electricity market:  240,000 MW of coal would produce roughly 34% of our electricity generation in 2015.[1] Under that scenario, the electricity industry would consume about 670 million tons of coal in 2015. [2].[3]

Coal’s market share (and influence) are certainly diminished, but there's a long way to go before "King Coal" is etched into a headstone.

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[1] Assumes a 62% capacity factor based on EIA’s Annual Energy Outlook results.  Forecasted 2015 electricity generation is also based on EIA projections.

[2] Assumes a 10.25 MMBtu/MWh heat rate and an average heat content of 10,000 Btu/lb of coal.

[3] That would be the lowest consumption level since the 1980s. The ICF report, however, finds that coal consumption will remain flat through 2020, which implies the remaining coal units would have a higher capacity factor than the 62% I assumed.

Inhofe v. Jackson: Who's Right About What's Ailing Coal?

I try my best to ignore the political rhetoric and fallacies that are so pervasive inside the DC Beltway, but this time I cannot.  

You know the routine: a representative from one political party says something – doesn’t matter if it’s divisive or innocuous – about an issue, which elicits an adamant rebuttal from the opposing party.  Mix in a hefty portion of disinformation, sprinkle with some sugarcoated facts, turn the spin cycle on high, and throw in the suffix “-gate” for good measure. Then repeat the process as necessary indefinitely.  

At issue here is an upcoming vote about air pollution regulations, and the latest bout in what some have dubbed the “War on Coal” (coal-gate would just confuse too many people). Many are opining about who (or what) is “killing” coal.  Some have blamed the Environmental Protection Agency's (EPA) regulations for creating a burden too large for coal power plants and the mining industry to bear.  Others say coal plants are at-risk for retirement because of market conditions and competition from low natural gas prices. 

In an interview last week, EPA Administrator Lisa Jackson cited low natural gas prices as the culprit behind coal’s struggles, and said: “So in my opinion the problem for coal right now is entirely economic.”  Senator James Inhofe (R-OK) fired off a letter to Jackson, criticizing her comments and blamed EPA for the coal industry’s struggles. (I'm looking for a link to the letter that does not reside behind a pay-wall, and will post it as soon as I find one).  Inhofe suggested that Jackson substitute her “judgment for that of qualified corporate planners.” 

Since I consider myself one of those qualified corporate planners – having worked at one of the nation's largest electric utilities (and coal consumer) doing economic analyses for environmental compliance and power plant retirement decisions – I thought it would be good for me to the evaluate the latest spat in the enduring battle between Inhofe and EPA.

Before sizing up their arguments, let me first digress and channel Mark Twain to say that the reports of coal’s death are greatly exaggerated.  I will substantiate this statement in a future blog post, but in my opinion, coal will remain a significant contributor to the nation’s electricity mix for at least the next 10-20 years despite the challenges the industry currently faces.    

So back to the action: who’s right? Is it natural gas prices or EPA regulations that are putting the pressure on the coal industry?

Assessing Lisa Jackson’s Assessment

In an interview with Grist last week, Lisa Jackson described coal’s problem as being “entirely economic.” Technically, Administrator Jackson’s statement is correct. The comparative economics between coal and natural gas clearly favor natural gas in both the “short-run” and “long-run” (definitions for non-econ wonks).  Jackson’s statement, however, is misleading because it implies that natural gas prices are the root cause.  Yes, natural gas prices are the predominant factor affecting the viability of coal plants, but regulations play a role as well.

Here is why: prior to the new environmental regulations, electricity planners had three basic options for their “uncontrolled” (i.e. without environmental controls) coal power plants. The options were:

1. Continue to operate the coal plant without environmental controls
2. Continue to operate the coal plant and invest in environmental controls
3. Retire the coal plant and replace with a new power plant or purchase replacement generation

The goal of electricity planners is to minimize total costs, and therefore in the absence of environmental requirements, they would tend to pick Option 1 – as long as the plant is in good working condition and its revenues exceed its costs.  This is because Option 1 already has sunk costs (the power plant itself), while Options 2 and 3 require significant capital investments.

The adoption of new environmental regulations changes the evaluation because Option 1 is non-compliant and is therefore no longer viable.  Electricity planners are left with two basic options: control the plant or retire it. The low cost of natural gas power plants and fuel coupled with the age and efficiency of uncontrolled coal plants make retiring coal units (Option 3) an attractive economic option.  So technically Lisa Jackson is correct, coal’s issue is an economic one, but part of the reason is because the regulations are changing the equation.

Senator Inhofe “killing” it?

Although Senator Inhofe clearly believes regulations are a significant problem for the coal industry, he opened his letter to Lisa Jackson by subtly admitting abundant natural gas plays a role in the problems facing the coal industry. He then claims Jackson’s statement “distorts economic realities.”  Ironically, Inhofe’s letter is also guilty of distorting reality.

Inhofe’s letter notes that Jackson’s assessment contrasts’ starkly with comments from EPA Region 1 Administrator Curt Spalding.  At first read, I was shocked by Spalding’s “comments” because I thought Inhofe had found the smoking gun proving an active conspiracy at EPA to “kill” the coal industry.   Here is the excerpt from Inhofe’s letter I found shocking: “…Spalding who openly admitted that EPA regulations, are in fact, killing coal and that EPA consciously and deliberately made the decision to do so… In his recent comments to a Yale University gathering caught on tape, Administrator Spalding said…” 

Then I read Spalding’s comment and watched the video of his talk at Yale (provided by Inhofe, watch here).  Instead of seeing some grainy footage of a flippant Spalding making disparaging remarks about the coal industry, I saw an honest assessment of how difficult it was for the EPA to make the regulations, especially when accounting for the potential impacts on people and communities.  Spalding never mentioned “killing”; the insinuation and emphasis was all Inhofe’s. 

The letter later stresses the need to take “company statements regarding the motivations for plant closures seriously,” and cites FirstEnergy’s decision to retire about 2,700 megawatts of coal-fired generation because of environmental regulations. FirstEnergy is an excellent company, but I found their decision peculiar, and I am not convinced that environmental regulations are the sole cause of the retirements. 

The compliance deadline for the new Mercury and Air Toxics Standards is mid-2015.  If the environmental rules were to blame for the retirements, why would they shut the plants down in September 2012 rather than run the units up until the compliance deadline?  The reason is economics, and supply and demand. 

Many of the units slated for retirement are older, smaller and inefficient (although surprisingly, there were a few younger, larger units on the list).  The units are likely uneconomic or marginally profitably to operate today.  Without access to FirstEnergy’s analysis, the simplest way to assess the value of the units is to look at their recent capacity factors.[1]  A high capacity implies the unit is cheap to operate and valuable, while a low capacity factor means a unit is marginal and more expensive to operate. Several retiring units operated at low capacity factors the last few years (see graphs below) due to increased competition from natural gas units, and decreased electricity demand from the recession.  The low capacity factors are a result of economic dispatch, not environmental regulations.

The supply and demand of power plant capacity is the other potential economic driver behind FirstEnergy’s decision to retire the units earlier than the compliance deadline. FirstEnergy’s remaining fleet suddenly becomes more valuable by retiring megawatts early and creating capacity scarcity. In PJM’s May capacity auction, capacity prices in FirstEnergy’s region cleared at $357MW/day compared to $167 MW/day for the remainder of the PJM market.  

Like Jackson’s comments, Inhofe’s letter is misleading and does not tell the entire story. It is evident that Inhofe’s letter is fraught with manipulative statements, and how powerful his (and the coal industry’s) use of terms like “war” and “killing” can be.  Unfortunately, most people do not have industry experience or the time to dig through articles, videos, and transcripts to find truth in the debate.

They are both right… and wrong

So who is right?  In my opinion, Administrator Jackson and Senator Inhofe are both right, and wrong.  Low natural gas prices, lower electricity demand, and environmental regulations are all contributing to coal’s struggles.  But natural gas is the predominant factor, not the EPA’s rules (this conversation does not happen if natural gas prices were $8/MMBtu instead of $2.50/MMBtu).

Is there middle ground?

On Wednesday, Senator Inhofe intends to bring the Congressional Review Act to vote. The ACT attempts to provide the coal industry relief by striking down EPA’s new Mercury and Air Toxics Standards.  In my opinion, that’s harsh move. Instead I’d support the reasonble alternative measure set forth by Sen. Lamar Alexander (R-TN) and Sen. Mark Pryor (D-AK) to move the MATS compliance date from 2015 to 2018.  The compromise would give the electric sector, affected communities and associated industries the ability to spread out their investments, and provide enough time to transition away from coal.

Here is to hoping cooler heads prevail.

Additional Reading:

http://nationaljournal.com/magazine/nick-akins-ol-king-coal-20120531

http://www.forbes.com/sites/kensilverstein/2012/06/16/perfect-storm-pulling-coal-sector-under/

http://energy.nationaljournal.com/2012/06/epas-cleanair-rules-defend-del.php

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[1] Capacity factor is the ratio of actual output from a power plant compared to its potential output if it were to run at full output.

Oil and the Bakken Boom

The summer driving season is underway, and it is an election year, so we can expect gasoline and oil prices to garner (even) more attention than usual.  (And expect more griping too!)  It’s early in the driving season, so instead of reminding you that you just spent $85 filling your Chevy Suburban, I decided to kick off the season with some encouraging news. First, gas prices are going down. Secondly, a greater portion of our petroleum expenditures are staying within our borders because domestic oil production is on the rise, especially in North Dakota.

The changing dynamics of America's oil supply is quite surprising because of the scale and speed at which the change is occurring. (The Washington Post had a good article about the subject this past weekend). In just a few years, the US went from seemingly being held captive by OPEC nations, to diversifying suppliers and increasing domestic production. We went from importing 60% of our liquid fuels in 2005 to 45% last year. US crude oil imports from OPEC nations dropped nearly 23% between 2008 and 2011.[1] And, as noted in the Washington Post article, North Dakota went from producing just a few thousand barrels of oil per day a decade ago to nearly half a million barrels today.

The growth in North Dakota production is astonishing. According to the Energy Information Administration (EIA), North Dakota produced about 153 million barrels of crude oil in 2011.[2]  Crude oil production in the Peace Garden State increased 144% between 2008 and 2011.  Only Texas, Federal Offshore developments, Alaska, and California produced more crude oil in 2011. North Dakota, however, is about  to supplant Alaska and California any day now (see graph below). 

The Bakken Shale formation is fueling North Dakota’s (and the country’s) oil production boom. High oil prices and the development of new drilling technologies is causing drillers to increase exploration, and allowing the extraction of oil from geologic formations - like the Bakken - once thought of as technically infeasible.

The Bakken is in northwest North Dakota and extends into Montana and Canada. Drilling in the Bakken began in 1953, but it took over 35 years before 100 wells were producing simultaneously. At that time in 1989, the average well produced 44 barrels of oil a day, resulting in monthly production of about 142,000 barrels.  From there, daily productivity steadily declined to a low of 8 barrels of oil per well in 2004. [3]  Then the boom began.

Since 2005, Bakken oil production has increased 24896%,[4] and now makes up about 89% of North Dakota’s oil production.[5]   Between March 2011 and March 2012, the number of active oil wells in the Bakken increased 62% to 3672, and the average well produces 139 barrels of oil per day. [6]  A record number of oil rigs - 214 - are currently exploring and creating new wells.[7]  North Dakota’s 2012 oil production is on pace to reach 192 million barrels, which is roughly equivalent to 12.5% of our 2011 crude oil imports from OPEC nations.[8]

The development of the Bakken is good news for the economy. North Dakota’s unemployment rate is currently 3%, which is lowest in the country, and much less than the national average of 8.1%.  Plotting oil production jobs (classified as mining and logging) in North Dakota shows a trajectory similar to the state's oil production. (See graph below).

The growth in the Bakken and other domestic reserves is also good for our balance of trade and energy security. (And it scares other countries too).  However, higher domestic production does not completely insulate us from future oil shocks because oil is priced on the global market. 

There are also concerns about environmental impacts associated oil drilling and consumption. Unfortunately, our economy is heavily dependent on petroleum, and alternatives have yet to displace a significant portion of our oil demands. It is important for oil producers to act in the safest and most environmentally responsible manner possible. Otherwise the economic and environmental costs can be devastating (just ask BP and the Gulf Coast). It is imperative that oil production (and energy policy in general) strikes a proper balance between economic, environmental, and national security considerations.

The good news is we're on the right track: we are producing more oil, importing less, and, using less of it.

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[1] http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRIMXX1&f=A

[2] http://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbbl_a.htm

[3] Statistics for this paragraph from: https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf

[4] Ibid.

[5] Based on https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf and http://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbbl_m.htm

[6] Statistics for this paragraph from: https://www.dmr.nd.gov/oilgas/stats/historicalbakkenoilstats.pdf

[7] http://www.minotdailynews.com/page/content.detail/id/566050/214--Another-record-for-N-D--oil-patch.html?nav=5010  

[8] Based on http://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbbl_m.htm and http://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_epc0_im0_mbbl_a.htm

This is my energy blog. There are many others like it, but this one is mine.

If you're reading this.... you already know... I created a blog (I know, so 2004).  Regardless, welcome to my inaugural post! Let me start with a little bit about myself and what I’m doing here. 

My name is Patrick Bean and I have been working on energy and environmental issues for several years.  I’ve worked at think tanks, a non-profit, a newspaper, a federal agency, and an electric utility. 

So why Honest Energy?  To me, honesty is a fleeting virtue when it comes to energy debates (and other hot-button issues).  Substance has taken a back seat to dramatizing arguments, making more noise than counterparts, and raising money to support your cause. 

I’m more interested in substance and analysis than buzz words and chest pounding.  

Energy plays a critical role in our lives, but it is often taken for granted, misunderstood, or falsely characterized.  My goal is to use this space to provide and disseminate information about anything and everything energy.  Well you might say, “how is this any different from other blogs?” or “oh great, just what the world needs… another blog destined for the doldrums of the interwebs.”  Fair enough.

I will try to make this space unique and educational. This blog will not be self-serving. I will use this space to share energy information with you in a pragmatic, common sense fashion.  I’ll try to make it as interesting as possible, and will:

·         Provide statistics because everyone loves obscure statistics!

·         Review reports

·         Critique policies

·         Develop strategies and solutions

·         Provide analysis

·         Assess energy markets

·         Evaluate company stocks

·         Point out ironies in many arguments

·         Provide opinions (DISCLAIMER ALERT: All opinions expressed here are my own, and, of course, should be adopted by you immediately). 

The topics may vary from post to post, from why Dominion’s stock may be undervalued, to solar development in the Southwest, or why electricity deregulation may have been a poor decision.  

I will also talk about why you shouldn’t waste your time boycotting your local Exxon station because of high gas prices, or why we can’t retire all of the country’s coal plants tomorrow and replace them with wind turbines and solar panels.  I am also happy to answer your questions and look into energy topics or companies that interest you.   

If this blog is destined for obscurity, then so be it.  If a single reader learns something, I’ll consider it a worthy endeavor.