Cheap Gas Is a Trap
Updated November 6, 2011, 07:00 PM
Matthew Kotchen is a professor of environmental economics and policy at Yale University.
New and efficient technologies for extracting oil and natural gas are increasing the supply of both fuels from North America. But the consequences will be different for oil than for natural gas. Oil is traded in a highly integrated world market, and the relatively small increases in North American oil will have virtually no effect on prices. The result is that our demand for oil will remain unaffected by the change in supply, though we may take comfort in knowing that more of the oil we use is produced closer to home.
Natural gas is a different story. The markets are far less integrated, so the increase in domestic supply will lower prices and increase demand. We will have more households switching from oil to natural gas for heating, and we will have relatively more electricity generated with natural gas than with coal. The lower prices will be a good thing for consumers paying their utility bills, and there will be health and environmental benefits because natural gas is a relatively clean fuel.
But more and cheaper natural gas does not help our prospects for bolstering renewable sources of energy, including solar, wind and biomass. History has shown repeatedly that nothing is worse for renewable energy — and the policies that support it — than cheap and abundant conventional energy. Without the urgency of high fuel prices, the United States has never sustained meaningful private and public investment in the technological innovation and deployment of renewables.
We should do our best to make sure this time is different. There has been meaningful investment — both public and private — in recent years, and despite our current economic challenges, it would be a mistake to turn back these efforts. Also, we must not throw out the baby with the bath water in response to the Solyndra bankruptcy. Instead, it is critical that we find ways to do better with the right economic incentives.
The expansion of oil and natural gas supplies in North America changes little about our long-term energy challenges. Beyond the growing demand for energy worldwide, climate change is an increasingly important and closely related problem. Conventional sources of energy generate greenhouse-gas emissions that cause global warming. While the burning of natural gas generates fewer emissions than oil and coal, its emissions are nevertheless substantial — and extraction using hydraulic fracturing raises other environmental concerns.
Renewable sources of energy provide a leading alternative, and we need a sustained commitment to improving these technologies with the aim of making them cost competitive. Indeed, it should be concerning that China is doing exactly this while we in the U.S. watch our former leadership in renewable energy continue to erode.
