Fossil Fuels

The ongoing fight over whether shale gas operations are leaking dangerous amounts of methane – a question that many have called critical to determining whether shale gas is good or bad – has suffered from a paucity of data. That’s why a much talked about study, authored by thirty scientists (mostly from NOAA) and published in early February, made such big waves: it was the first (and remains the only) study to estimate shockingly high emissions based on actual observations in the field (data was collected in Colorado in 2008). In a new paper in press at the Journal of Geophysical Research (preprint here), the same journal that published the NOAA results, I explain why the NOAA estimates are unsupportable. (Short version: great data; wrong interpretation.) I then exploit some data that the NOAA team reported but did not use in their calculations to re-estimate methane leakage rates. I find methane leakage rates that are most likely between 1 and 2 percent, very similar to what previous careful estimates have consistently indicated, but far lower than the rates -- as high as 7.7 percent -- that the NOAA study claimed. I might try to explain the technical issues involved in the analysis in a future blog post. (Summary: The original paper relied on a critical but flawed assumption; my paper does away with it.) For now, though, I want to focus on the big picture. It’s summed up in the figure below, which is taken from my paper. The NOAA authors estimated emissions in two ways. The first was a traditional “bottom-up” method (second from the right) based on past observations of emissions from various gas-related processes. That yielded an estimate that about 1.7% of total production was leaking, with a possible range of 1.3-2.0%, similar to previous analyses. The second was the “top-down” method that generated such alarm (far right), which took observations of methane in air and used some simple calculations to infer estimates of how much methane was leaking from natural gas systems. That approach implied that 2.3-7.7% of produced gas was leaking, with a best guess of about 4.0%. Those are indeed massive numbers. My new analysis of the top-down numbers paints a far less shocking picture. My paper reports its results in terms of absolute leakage, as the original paper does, but since people are more used to thinking about leakage rates, I’ll use those here. Using the same method for converting absolute leakage to percentage rates that the NOAA authors used, I find that leakage is most likely 1.5-1.7%, with a possible range (using a very conservative estimate of uncertainty) of 1.3-2.3% (far left in the figure). This is similar to what bottom-up estimates, not only from the NOAA authors but from places like the EPA, have found. There are, of course, big limits to my own analysis. That’s in part because I’ve kept much of the original paper’s methodology (which that paper and mine both point out has limitations) intact. It’s in part because the underlying data that I’ve analyzed comes from only one region at one point in time. (Among other things, Colorado has imposed tough rules on methane emissions since the NOAA data was collected in 2008.) I’d still like to see more data, and am glad that people appear to be hard at work collecting it (kudos to EDF), but for now, I’m deeply skeptical of claims that massive amounts of methane are leaking.

What’s roiling the oil market right now? The old familiar source of instability—unrest in the Middle East—is far from the whole story, though it still tends to be the first place Western pundits look when the world’s most important commodity is in turmoil. But this paradigmatic hangover from the 1970s has become less and less adequate. In a piece for Foreign Policy, I argue that a significant amount of the volatility in energy markets these days comes from sources closer to home than many U.S. and European policymakers would probably wish to admit. Economic and political uncertainty emanating from major oil-consuming countries—the United States, Europe, and China in particular—is proving at least as unsettling to oil prices as any decisions by Middle Eastern or OPEC officials. Check out my argument here.

A recent agremeent between Sudan and South Sudan to restart oil exports is likely to improve the macroeconomic situations of the countries, while paving the way for future negotiations over land disputes, says expert Alex de Waal.

U.S. carbon dioxide emissions for January-May are down six percent from 2011 to 2012. Headlines have highlighted the fact that emissions from January-March hit a twenty year low. What explains the shift? That question has been the subject of intense debate. John Hanger argues that 77 percent of that decline can be attributed to the shift from coal to gas. The folks over at CO2Scorecard, looking at January-March data, put that number at a more modest 21 percent. These are drastically different figures. What number should we believe? Part of the discrepancy comes from looking at different time periods. January-March emissions were affected more by the warm winter than April-May ones were. That makes sense because January-March is part of the winter. April-May emissions were affected more by rock bottom natural gas prices than January-March ones were. That makes sense because it was April-May when rock bottom (i.e. sub-two-dollars wellhead) natural gas prices prevailed. Let’s focus on the full January-May span, since it’s now the longest period for which we have 2011 and 2012 data, and do the analysis for ourselves. First the basics: Carbon dioxide emissions fell from 2,303 metric tons (Mt) in 2011 to 2,158 Mt in 2012, a drop of 145 Mt. (To keep things simple, the January-May time period is implicit in all this.) The basic story is that emissions from coal consumption plummeted by 132 Mt. Falling oil emissions chipped in another 18 Mt. Natural gas emissions were nearly flat; they were actually down 5 Mt. This would seem to suggest that natural gas played little role in falling emissions. Instead, it appears to suggest, reduced demand for coal is what did the trick. This’s roughly the intuition behind the conclusion from CO2Scorecard that natural gas has played a modest role in the U.S. emissions decline. Hanger contests this by making three basic points. First, he notes, “about 85% (132 of 144 million tons) of the 2012 U.S. Carbon emission decline is a product of falling emissions from coal.” Second, he argues, the decline in emissions from coal are “almost entirely as a result of more gas displacing coal generation this year.  Indeed, coal’s electricity generation market share fell from 42% for all of 2011 to 32% in April and 34% in May.” Third, he observes, “Electricity demand is down 2% in the first 5 months of 2012 compared to 2011 so that is a small reason for declining emissions and probably explains about 10% of the 132 million ton decline of coal emissions.” Hanger puts these together with a few other estimates to come to his conclusion that 77 percent of the emissions decline is due to gas. I’m skeptical. Hanger seems to have focused too much on the power sector. Only 59 percent of the decline in CO2 emissions from 2011 to 2012 came from the power sector.That said, I’m largely with Hanger in his analysis of what happened there. Coal generation plummeted and was replaced almost entirely with natural gas. Renewable energy generation was down slightly, nuclear was flat, and total electricity consumption fell only 1.8 percent, undermining claims that a warm winter is what pushed carbon dioxide emissions down. If you assume that the entire 1.8 percent decline in demand came at the expense of coal, and spread that evenly over all coal plants, you can estimate that 12 Mt of the emissions reduction came from lower electricity demand. To be certain, that’s probably an underestimate, since the least efficient (i.e. most polluting) plants are the most likely to shut down. Let’s say that 15 Mt of the emissions decline came from reduced electricity demand. That’s the same a Hanger’s number even though we’ve taken a slightly different route to get there. The rest – about 70 Mt – should have come from substitution of natural gas for coal. What about the other 41 percent – 60 Mt – of the emissions drop? A sharp decline in residual fuel oil consumption in the transport sector (basically in ships) kicks in 12 Mt. This mostly transpired during 2011. Someone more knowledgeable than me will surely have a decent guess of what explains the shift. It isn’t a shift to natural gas, which was flat in the sector. But the biggest source of emissions reductions from outside the power sector – fully 42 Mt – comes from a drop in direct residential (31 Mt) and commercial  (11 Mt) natural gas use. You read that right: it is a reduction in natural gas use, not an increase, that explains much of the decline in U.S. carbon dioxide emissions. This is almost entirely a story about reduced heating need, since most of the drop came in the first three months of the year. So let’s tally things up. Natural gas cut U.S. carbon dioxide emissions by somewhere around 70 Mt between January-May 2011 and January-May 2012. This means that you can chalk up about half of the drop in U.S. emissions to abundant natural gas. Quantitatively, this conclusion lies somewhere between CO2Scorecard and John Hanger. More fundamentally, it’s closer to the CO2Scorecard numbers, which look beyond the power sector too. My numbers for the contribution of natural gas are higher than theirs because I’m looking at a longer time period and because I think that they substantially overestimate how much natural gas has already displaced nuclear and renewables. I want to leave you with one more quick estimate that I find illuminating. The mini-war over how much of the recent decline in U.S. emissions could be attributed to natural gas was sparked by headlines claiming that U.S. emissions had dropped to a twenty year low. A drop due to a warm winter, people correctly pointed out, would be transient, and hence made for a poor comparison. So let’s factor that out: had the winter of 2012 been similar to that of 2011, U.S. emissions would presumably have been between around 65 and 75 Mt higher, or somewhere around 2,225-2,230 Mt. (I’ve given a range because I have no idea whether to associate the drop in demand from ships to the warm winter.) The last time emissions were below that level was 1993 1994. Instead of a twenty year record, we’d have a ten year one. Still, that’s not too shabby. The upshot is that we’d still be close to a twenty year low even without the warm winter.

Markets thrive when information is cheap, abundant, and reliable. This rule holds true for all sorts of markets, from housing to stocks to energy. More transparency in energy markets makes them better able to respond to supply-and-demand signals and makes pricing more efficient. Many countries could help the oil market function better if they were more forthcoming about their supply, demand, inventory, and reserve data. The United States deserves credit for the enormous service it performs by releasing timely, comprehensive, and free information about the flow of oil within its borders. But is there more the United States could be doing at home to promote a sound oil market? I think so. As I argue in a post on CNN’s Global Public Square (GPS), oil traders are becoming increasingly skeptical that the U.S. Strategic Petroleum Reserve (SPR) is as “usable as advertised,” as Citigroup’s Edward Morse detailed in a February 2012 piece in the Financial Times. Dramatic changes to North American oil infrastructure in recent years have raised legitimate concerns that unloading oil from the SPR can no longer be done as efficiently as it once could. Phil Verleger and others have also raised awareness of this important issue. The U.S. Department of Energy can help address the market’s concerns in this respect, using a solution I propose in my CNN piece. It is in Washington’s interest to do so. If there’s one thing the United States should have learned from Saudi Arabia and its OPEC brethren, it’s that failure to stamp out skepticism about supply capabilities can have lingering malignant effects on the oil market. By shining a light on the U.S. SPR’s capabilities, the Department of Energy can continue to help foster a well-informed marketplace.

In an op-ed I wrote for the Houston Chronicle on Friday, I tried to distill some of the policy lessons from my major new study on the Strategic Petroleum Reserve, which was published by CFR last week. Here are a few: -- Policymakers should be under no illusion that tapping public stocks can allow them to dictate prices. Broader market forces can easily overwhelm an SPR release’s effect on the domestic price of oil. But that does not mean that SPR releases are inconsequential. Their primary value, though, is often in helping to keep prices from rising further, not in ensuring they decline. -- An SPR release aimed at lowering prices is hardly a free lunch. Yes, it can stop the bleeding for a time—but once the sharks smell blood, it can make matters worse. -- The advisability of an SPR release should be measured by its ability to lessen the economic pain of a significant supply disruption. True, the magnitude of the oil lost (or "likely to become" so, according to the 1990 amendment to the Energy Policy and Conservation Act, or EPCA) is a necessary condition for an SPR release. But the shortage’s likely impact on the national economy is another vital variable for policymakers to keep in mind. The wording of the 1975 EPCA, which first established the SPR, makes this clear. It’s not just about barrel counting; the economic context, and what (if anything) an SPR release can do to help, should be a major part of a drawdown decision. For anyone interested in the debate over the pros and cons of tapping the SPR right now, check out the piece here.

As anyone who follows the oil market knows, speculation is rife that the White House may soon decide to tap the U.S. Strategic Petroleum Reserve (SPR). Whether they will remains to be seen. But before officials in the United States and other International Energy Agency (IEA) member countries take any action, it’s crucial they weigh the lessons of last summer’s release of national oil stockpiles. In a new CFR study, I’ve tried to tackle exactly that issue: What can the 2011 oil release teach us for 2012? Various debates about the SPR have been making headlines in recent months: that it’s too big, or that it shouldn’t exist at all; that it has no effect on prices, that it does; that it is nothing more than a political tool, that it is actually a critical resource. My study helps make sense of some of these contradictory views. It combines participant interviews with independent analysis to assess lessons from the 2011 IEA emergency intervention for physical and financial markets, U.S. SPR operations, and international diplomacy. You can read the paper here.

The ongoing debate over whether to allow liquefied natural gas (LNG) exports has featured a recurrent theme: people insist that the gas would be better used within the United States. “We will go down,” T. Boone Pickens has written, “as the dumbest generation ever if we export our clean, cheap, abundant supplies of natural gas in favor of dirtier, more expensive OPEC oil.” In a letter to the editor today responding to my op-ed on the subject of a couple weeks ago, Bob Bailey writes, “We finally have an alternative to foreign oil in the form of natural gas, and Mr. Levi wants to ship it overseas. I’m confused. Why don’t we keep this resource here? Use it here?” I actually agree with much of the sentiment. If the United States exports as much natural gas as many currently envision, it will probably be a sign that U.S. policy has failed. But the right response is not to bar exports – it’s to directly boost other sources of natural gas demand. The underlying logic is similar across different uses for natural gas. Exports raise natural gas prices. That reduces natural gas use in other sectors. Conversely, though, boosting natural gas consumption in other sectors increases natural gas prices. That reduces exports. This applies no matter what the alternative use is for natural gas. Want to use natural gas as a more climate-friendly substitute for coal? Implement a carbon price, clean energy standard, or regulation that promotes greater use of gas. Natural gas prices will rise. As a result, the gap between U.S. and overseas natural gas prices will shrink. Some export projects will no longer be viable. Exports will thus decline. How about natural gas as a transport fuel? Same thing. Write CAFE standards in a way that boosts the use of natural gas in cars and trucks, subsidize the purchase of natural gas vehicles, or raise oil and gasoline taxes, and more people will use natural gas for transport (including through conversion of natural gas to methanol and other fuels). Natural gas prices will rise, the gap between U.S. prices and overseas ones will decline, and exports will no longer be as attractive. The same thing even holds for natural gas use in manufacturing. I happen to find arguments in favor of using policy to steer natural gas into manufacturing suspect. But perhaps you don’t. Then subsidize manufacturing, as several administrations have done (and continue to do) through the tax code. You know the routine by now: more gas use in manufacturing will boost prices, and exports will decline. We can even put some numbers on this. Recent modeling by the EIA suggests that a modest price on carbon could raise natural gas use in the power sector by as much as five billion cubic feet a day as of 2020. Using natural gas to back out a million barrels of oil a day in the transport sector could add roughly six billion cubic feet a day of demand beyond that. The EIA has recently estimated what that much new demand might do to natural gas prices (though in a different context). Assuming no surprises on the supply side, natural gas prices circa 2020 would rise from about six dollars to between seven and eight dollars for a thousand cubic feet. This would erode a decent part (if not all) of any edge that U.S. exports might have. The result would be lower (or vanishing) exports in the first place. What if U.S. shale gas resources turn out to have been overestimated? The combination of scarcer gas and a big boost in domestic demand would crank prices up quickly. It would not be surprising to see prices rise well above ten dollars for a thousand cubic feet (though demand in other sectors would probably fall to restrain that increase). Needless to say, with natural gas prices that high, exports would most likely become uneconomic. U.S. exporters would probably still do just fine – their contracts typically guarantee payment for liquefaction services regardless of whether those services are actually used. Actual exports, though, would not materialize in any meaningful quantity. None of these domestic policies, of course, would be easy to implement. But blocking exports isn’t an effective substitute. Barring exports would do far less than even mediocre climate policy to move natural gas into power plants. Moreover, it would actually undermine renewable energy, nuclear power, and energy efficiency. Its impact on natural gas use in transport would be negligible. People who want to see the United States make better use of its natural gas have only one option: they will need to promote those better uses directly.

Mitt Romney released his energy plan yesterday. I critique it in a new piece in Foreign Policy. Here’s the kicker: "There are many good reasons to embrace rising U.S. oil and gas production and to reform the way government regulates their development. The Romney strategy for fossil-fuel development has some reasonable proposals on both fronts. But when it comes to comprehensively exploiting energy opportunities and confronting energy-related risks, the strategy falls woefully short." I also take issue with some of the claims that the proposal makes about the likely consequences of its policies. In particular, while the proposal relies heavily on recent Citigroup estimates of potential job gains and economic growth from energy developments, the Romney plan differs from the Citigroup scenario in important ways, particularly when it comes to efficiency measures. It strikes me that those differences make it incorrect to tightly link the Citigroup projections to the Romney plan. Click here to read the rest of the FP article.

The Associated Press reported last week that U.S. greenhouse gas carbon dioxide emissions have dropped to a twenty-year low on the back of abundant natural gas. “The question,” it correctly observed, “is whether the shift is just one bright spot in a big, gloomy [climate change] picture, or a potentially larger trend.” I’ve argued repeatedly in the past that surging supplies of natural gas are good news for climate change. But there are important limits to what U.S. natural gas can do. This post is going to illustrate those with some simple numbers. Let’s start with a reference point. In 2009, in advance of the Copenhagen climate summit, the United States pledged to reduce (PDF) its greenhouse gas emissions to 17 percent below 2005 levels by 2020. It also repeatedly emphasized its intention to reduce those emissions to 30 and 42 percent below 2005 levels by 2025 and 2030 respectively. How far down that road could a shift from coal to gas get the United States? I’m going to focus on carbon dioxide emissions from energy. The EIA currently projects that U.S. emissions will be 5,429 million metric tons of carbon dioxide (MtCO2) by 2020, assuming that currently pending fuel economy rules for 2017-25 go ahead as planned. 1,787 MtCO2of that total would come from coal; 1,371 would come from natural gas. That already reflects a gradual substitution of gas for coal. But what would happen if natural gas completely replaced coal? Assume that the emissions from gas are about half those from coal. Then U.S. emissions would drop to 4,536 MtCO2. That’s 24 percent below 2005 levels. That leads to our first conclusion: substituting natural gas for coal has the theoretical potential to get us to our 2020 carbon goals. But, unless we deploy it with carbon capture and sequestration, it cannot get us to our 2025 or 2030 goals. (The 2025 and 2030 comparisons require a little bit of extra math that I won’t go through here.) One can push this a bit farther, supposing that natural gas completely replaced oil in residential, commercial, and industrial applications. Oil use in those three sectors is projected to generate 462 MtCO2 in 2020; replacing oil with natural gas could in principle reduce those emissions by somewhere around 150 MtCO2. That doesn’t change our bottom-line conclusions. But we’re not done. These figures are extreme limits that assume spectacular gains in natural gas use. Alas those gains aren’t practical. Focus on the coal-to-gas shift. I estimated that a complete replacement of coal with natural gas could slice 894 MtCO2 off of U.S. emissions. You need to burn about 18.2 Mcf (thousand cubic feet) of natural gas to generate a ton of greenhouse gas emissions. This implies that completely replacing U.S. coal with natural gas would require roughly 16 trillion cubic feet (Tcf) of additional natural gas. That’s a 60 percent increment to projected natural gas supplies in 2020. Put another way, it’s more than double the amount of natural gas currently used in U.S. power plants. This is almost certainly not a practical addition to U.S. natural gas production. Perhaps a more reasonable (but still challenging) outer limit would see half of the U.S. coal use currently anticipated for 2020 replaced with natural gas. That would result in U.S. emissions 17 percent below 2005 levels, meeting the strict part of the Copenhagen commitment but leaving a big lift for other shifts to deliver on the follow-on targets. The bottom line? Natural gas can do a lot to bend the U.S. emissions curve over the coming years. In even the medium run, though, simply moving from coal to gas is not a substitute for broader policy, at least not if the United States wants to realize the sorts of emissions cuts that both Barack Obama and John McCain talked about only four years ago. Best to think of gas as a climate opportunity – to forestall construction of long-lived and highly polluting infrastructure,  to make carbon capture and sequestration cheaper, to balance intermittent renewable sources – rather than as a solution in itself.

I argued in a New York Times op-ed yesterday that the United States should allow LNG exports while guarding against downside risks to the local environment and low-income consumers. Joe Romm at the Center for American Progress has now published a 1,100-word attack on the piece. I’d normally not respond at length, but his critique hits on multiple fronts, and our two blogs have many readers in common. This post will go line-by-line through his critique and explain why it’s wrong. First one overarching point: The consequences of LNG exports for climate change will almost certainly be small. I asserted in my op-ed that they would probably be good. Regardless, though, they are not reason enough alone to say yes to exports. The strongest case for allowing exports is that saying no poses big risks to U.S. leverage in the WTO and NAFTA, with much broader ramifications for the U.S. economy and its standing in the world. Romm begins with this: The NY Times piece asserts offers [sic] this paragraph as the sole defense to the well-known charge that LNG exports are bad for the climate: “At the same time, exports would likely reduce global greenhouse gas emissions. Moreover, the small price increases that would result from allowing exports would have at most a marginal impact on the use of natural gas as fuel for cars and trucks. Blocking exports wouldn’t push natural gas into automobiles — it would mostly keep it in the ground, because there would be less incentive to extract it.” The argument about cars and trucks is a red herring (at best) since replacing gasoline with natural gas in vehicles is pretty clearly a loser from a global warming perspective — and always will be – as a major 2012 Proceedings of the National Academy of Sciences study makes clear. There are three problems here. First, as Romm knows, I justify my claim on climate at length in a recent study, which is mentioned and linked to in the op-ed. Second, as the broader op-ed makes clear, the discussion of automobiles is not intended to have anything to do with climate. I note earlier in the piece that many worry that exports would undermine efforts to put natural gas in cars and trucks. The discussion of autos here is addressed at that. Third, the PNAS study that Romm references assumes a 20 percent efficiency penalty for CNG vehicles. That is a decade or so out of date. There is a lot of great stuff in the PNAS paper, but this is a major flaw, and its undermines its conclusions on CNG. In any case, none of this has anything to do with my LNG argument. Onward with Romm’s analysis: It is head-scratching to say the least to claim that exports would reduce greenhouse gas (GHG) emissions when the Times acknowledges that blocking exports would leave this fossil fuel in the ground! Burning natural gas releases GHGs. We need to slash global GHGs 50% in four decades merely to have a shot at keeping total warming anywhere near 2°C (3.6°F), a point beyond which risks to human civilization multiply exponentially. This is not head-scratching in the least. Exported natural gas would most likely primarily replace coal in Asia. Burning gas releases fewer GHGs than burning coal. This is not complicated – it is the same thing that is happening in the United States. Worse, natural gas extraction is leaky, and natural gas is mostly methane, a highly potent GHG (with some one hundred times the global warming potential of carbon dioxide over a 20-year period). Most of the new natural gas in this country comes from hydraulic fracturing, which is widely thought to be leakier than conventional gas extraction. And? Analysis after analysis – including the PNAS study Romm references – has concluded that, in the long run, this barely makes a dent in the greenhouse gas advantages of natural gas over coal. Worst of all, cooling natural gas to about −162°C (−260°F) and shipping it overseas for use in distant countries is costly and energy-intensive: “The process to bring the gas to such low temperatures requires highly capital intensive infrastructure. Liquefaction plants, specially designed ships fitted with cryogenic cooling tanks, regasification terminals and domestic transmission infrastructure all make LNG relatively expensive in construction and operational cost.” When you factor in the energy and emissions from this entire process, including shipping, you get a total life-cycle energy penalty of 20% or more. The extra greenhouse gas emissions can equal 30% or more of combustion emissions, according to a pretty definitive 2009 Reference Report by the Joint Research Centre of the European Commission, Liquefied Natural Gas for Europe – Some Important Issues for Consideration. Let’s take the JRC report on face. Two problems remain. First, even if you add 30 percent on top of combustion emissions, that takes you from gas having about 50 percent of coal’s emission to gas having about 65 percent of those emissions. That’s still a big improvement. Second, part of those extra emissions are offset by lower industrial emissions in the United States. The net penalty is thus considerably smaller. The NY Times piece actually makes this odd argument on behalf of LNG exports: “It will take years before any export terminals are up and running — in the meantime, producers and regulators should strengthen safeguards so that gas is extracted safely.” The piece does not offer this as an argument on behalf of exports. That sentence is in a section about the downsides of exports. It is quite clear in the op-ed that I am arguing there in favor of strengthening environmental protections. But this is yet another reason why LNG exports make no sense. Why would we want to start massive exports of natural gas around the end of this decade, with costly new infrastructure that until mid-century [sic]? If avoiding catastrophic climate change is your goal, then spending huge sums on even conventional natural gas infrastructure is clearly not the answer, as a recent International Energy Agency report made clear: “The specific emissions from a gas-fired power plant will be higher than average global CO2 intensity in electricity generation by 2025, raising questions around the long-term viability of some gas infrastructure investment if climate change objectives are to be met.” Duh! Or is that D’oh? And as we’ve seen, LNG shipped from the U.S. is much worse from a GHG perspective than regular gas, so by the time a lot of new LNG terminals are up and running in this country, it seems likely that LNG-fired plants overseas will be have a higher GHG intensity than the average plant in the electric generation system needed to be anywhere near a non-catastrophic emissions path.” There are three problems with this argument. First, though Romm doesn’t say it, the IEA report is describing a scenario that is drastically different from the current path. In the world it describes, greenhouse gas emissions are far lower, putting the world onto a 450 ppm course. Part of what it takes to get to that world may be substitution of natural gas for coal. Second, the gas infrastructure that is likely to be threatened in that world is old, inefficient capital, not the new and more efficient plants that would be built if gas nudged out coal. Third – and this is the big one – global average CO2 intensity is the wrong thing to look at. If U.S. LNG was replacing nuclear power in France, then perhaps it would make sense. But U.S. LNG would almost certainly make its way to Asia, where the CO2 intensity of displaced electricity generation would still be far higher than that of gas, even on a 450 gas. Natural gas would bring average CO2 intensity down. We do not want to build a global energy system around natural gas (see IEA’s “Golden Age of Gas Scenario” Leads to More Than 6°F Warming and Out-of-Control Climate Change). At the time, the UK Guardian‘s story put it well: “At such a level, global warming could run out of control, deserts would take over in southern Africa, Australia and the western US, and sea level rises could engulf small island states.” That’s true. It’s why a permanent shift to natural gas with carbon capture and sequestration would be unwise. But that isn’t what we’re talking about here: we’re talking about low-level exports of LNG. The extra emissions from LNG all but eliminate whatever small, short-term benefit there might be of building billion-dollar export terminals and other LNG infrastructure, which in any case will last many decades, long after a sustainable electric grid will not benefit one jot from replacing coal with gas. This isn’t true. The extra emissions from LNG still leave it substantially better than coal. Unless the counterfactual is Chinese, Korean, and Indian energy systems that use no coal by 2025, natural gas is an improvement. Asserting any net benefit requires assuming the new gas replaces only coal — and isn’t used for, say, natural gas vehicles, which, as noted, are worse for the climate or that it doesn’t replace new renewables.  If even a modest fraction of the imported LNG displaces renewables, it renders the entire expenditure for LNG counterproductive from day one. I’ll hold my breath until Asian consumers decide to switch from petrol-powered cars that depend on flexible global oil markets to NGVs that depend on rigid and expensive LNG imports. That doesn’t seem likely to happen. As for renewables, what Romm writes is untrue. Say that gas displaces 60 percent coal and 40 percent renewables (along with conservation/efficiency). Then, even if we assume like Romm that LNG is only 40 percent better for climate than coal, the net result remains neutral for climate change. (I’ll leave the arithmetic to the reader.) Remember, a major 2012 study on “technology warming potentials” (TWPs) found that a big switch from coal to gas would only reduce TWP by about 25% over the first three decades (see “Natural Gas Is A Bridge To Nowhere Absent A Carbon Price AND Strong Standards To Reduce Methane Leakage“). And that is based on “EPA’s latest estimate of the amount of CH4 released because of leaks and venting in the natural gas network between production wells and the local distribution network” of 2.4%. Many experts believe the leakage rate is higher than 2.4%, particularly for shale gas. Also, recent air sampling by NOAA over Colorado found 4% methane leakage, more than double industry claims. The impact on warming over the next three decades isn’t what matters most. Peak warming, even if we curb emissions sharply, won’t hit until well after that. That’s where we need to focus – and the PNAS study shows that gas regains its advantage over that timescale. As for the NOAA study, I’m going to have to remain mum, for reasons that I should be able to talk about fairly soon. All I can say for now is that it has big problems that render its conclusions unreliable. A different 2012 study by climatologist Ken Caldeira and tech guru Nathan Myhrvold finds basically no benefit in the switch whatsoever — see You Can’t Slow Projected Warming With Gas, You Need ‘Rapid and Massive Deployment’ of Zero-Carbon Power. That study takes into account the near-term impact of the construction of new infrastructure. As the authors of that study know, the finding of "basically no benefit" results from odd and unsupportable assumptions about emissions from gas compared to emissions from coal. The study assumes that CO2 emissions from gas are almost as high as those from coal (70-80 percent as high) when burned in a power plants of similar efficiency; adjusted for the efficiency factors used in the study, emissions from gas come in at 60-80 percent those of coal. (You can work this out from Table S1 in the Supplementary Online Material.) None of this, of course, is correct. I assume that this was an accidental mistake by the authors. They have been told about it, not just by me, but the paper has not been corrected. Their findings on gas ultimately have little to do with the emissions generated from building new infrastructure; they arise from incorrect assumptions about CO2 emissions from gas in the first place. BOTTOM LINE: Investing billions of dollars in new shale gas infrastructure for domestic use is, at best, of limited value for a short period of time if we put in place both a CO2 price and regulations to minimize methane leakage. Exporting gas vitiates even that limited value and so investing billions in LNG infrastructure is, at best, a waste of resources better utilized for deploying truly low-carbon energy. At worst, it helps accelerates the world past the 2°C (3.6°F) warming threshold into Terra incognita — a planet of amplifying feedbacks and multiple simultaneous catastrophic impacts. My bottom line? This sets up a false choice. Blocking natural gas exports won’t drive money into zero-carbon energy. Good policy that prices carbon or establishes a clean energy standard will. Better to focus on that than to endanger the global trading system in a quixotic fight to restrain exports, particularly when allowing exports would probably reduce global emissions a bit.

In today’s monthly Oil Market Report (OMR), the International Energy Agency (IEA) weighed in on how it sees the recent hostilities and pipeline tariff deal between Sudan and South Sudan affecting oil production there through 2013. This is hardly an academic question. The loss of South Sudan’s oil has been one force putting upward pressure on global prices this year, and oil is critical to the economy and stability of both countries.  The IEA’s bottom line? Don’t hold your breath for things to get much better, at least in terms of oil production, despite last weekend’s encouraging developments. And plenty can still go wrong. Last Saturday, the two countries reached an interim deal on the contentious issue of how much South Sudan (the site of three-quarters of the pair’s oil production) would pay Sudan (which controls the pipelines that export its neighbor’s oil) in pipeline transit fees. Coming to an agreement over how to split their oil revenues has been extraordinarily difficult for both sides, and understandably so, dependent as they both are on that source of wealth. The transit fees are part of a broader dispute, which also includes “a security deal over borderlands, disputed territories and proxy militias,” that was severe enough to shut down South Sudanese oil production altogether in January. When the deal was stuck last week, some sources rejoiced that the flow of oil would be restored again “in a matter of weeks.” Apparently the IEA does not share that optimism. The IEA argues that “news of the deal does not, however, dramatically change our view on production prospects” over this or next year. “Restarting crude production will not be easy.” Instead of the roughly 450 thousand barrels per day (kb/d) the two countries collectively produced in 2011 (see Figure 1), the IEA sees no more than one-third of that rate being achieved in 2013. What’s more, it foresees oil production from both countries averaging just 60 kb/d over the upcoming quarter—a paltry 13 percent of year-ago levels. Figure 1. Sudan and South Sudan Oil Output (2010 - 2012, including IEA forecasts) Source: IEA OMR July 2012 [*Note these are July, not August, IEA numbers]. The IEA goes on: “Industry sources have been quoted as saying that restarting oil production could take six months or even longer, since the lines have been filled with water and because some wells were not closed properly.” And it emphasizes that “contentious issues remain”: “Sudan stresses that the implementation of the transit agreement will not go into effect until the sides agree on border security and the status of the Abyei area. Talks have broken down several times in the past over the location of a demilitarised zone, which would represent the first step to ending hostilities. The sides are unlikely to continue the requisite negotiations on border security until after Ramadan, at the end of August. According to the African Union Peace and Security Council (AUPSC), the parties have until 22 September to resolve the remaining issues.” Given the stakes involved, it’s an issue worth keeping an eye on as events unfold.

The U.S. Energy Information Adminstration (EIA) published its Short-Term Energy Outlook (STEO) on Tuesday. This report is one of three official monthly sources of data and forecasts that energy analysts often look to in order to understand market conditions. (The International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC) release similar reports with their own numbers.) I want to highlight one section of the STEO that should be interesting to policy and market analysts but often seems to go unnoticed. It is the analysis of "market-derived probabilities" in the “Market Prices and Uncertainty Report,” a supplement to the STEO first added in October 2009. The EIA developed it to “provide a measurement of the market’s expectations for how uncertain future energy prices are,” in the words of the EIA’s James Preciado, who helps create the report. For the technically inclined, Preciado describes the methodology: “We use the futures price traded on NYMEX, implied volatility, which is a trading volume weighted average of the two call option contract prices with strike prices closest to the futures price, and time to expiration as inputs into a probability model.  The model is a log-normally distributed random walk, the same used in the assumptions for the Black-Scholes option pricing formula.  The output is the density graph of the market’s expectation for the probability that oil prices will exceed different price points.” The result is a snapshot of where the options markets suggest futures prices might fall at a given point down the road. Figure 6 (taken from the EIA’s August 2012 STEO) shows a measure of the probability of the November 2012 West Texas Intermediate (WTI) crude oil contract expiring above various price levels. The curve shows a 21 percent probability, in the eyes of the options market, that the November 2012 WTI futures contract will expire above $100 per barrel. That is a 4 percent decrease from two months earlier. As the EIA points out, this decrease in likelihood is likely due to the fact that, with November drawing closer, the market judged the probability of a significant uptick in prices (from their $87-$92 per barrel range in the five trading days around August 2) before then to have decreased since June. The average price and implied volatility of the underlying futures contract were “relatively unchanged” between early June and August, the EIA argues, so they weren’t the likely reason for the change in perception. The EIA provides similar calculations for U.S. gasoline and natural gas prices (see Figures 9 and 15). So how are these calculations useful to those interested in public policy? Here are three ways: First, they can help bring back to Earth the sometimes wild-eyed speculation in popular rhetoric about energy markets, ala "guess where gasoline prices might go this summer” or “traders think oil prices are heading much, much higher later this year.” We’ve all heard these stories, especially in times of high economic or geopolitical uncertainty. These calculations are a first step toward putting such conversations on more informed footing by providing data-driven insight into market perceptions. Second, these probability functions can help policy analysts understand how market participants perceive certain events, such as the onset of the Arab Spring or the 2011 IEA-coordinated SPR release, as affecting uncertainty in the oil market. Though hardly the full story, the data can supplement the kind of anecdotal evidence that is often cited in those debates about perceptions of past events or policy measures. And third, policymakers can benefit from getting a sense of what the market’s take on potential future price conditions. Of course, futures prices are often poor predictors of actual prices. Yet policymakers often rightfully care about market perceptions. Here’s a simple (if limited) tool for getting a handle on what the energy market is thinking about the future, brought to you by the good folks at the EIA.