The Energy Resources Are Out There

In the world of energy and scarcity, the name of the next president of the United States will matter quite a bit. "People are policy," as Ronald Reagan used to say.

But then again, a lot of energy and scarcity facts defy party labels. The energy resources are out there.

They are what they are and where they are. We can exploit the resources or not. But it's not like in Star Trek. There's no "dilithium" power source out there to keep the economy running.

So for the next president and his administration, it's a question of doing something. The U.S. can always just go on importing large amounts of its energy supply. That sure has worked well in the past, hasn't it?

There's offshore oil and gas. There's onshore oil and gas. There's coal. There's uranium.

There's biomass, wind, solar, geothermal, falling water and tidal power. There are conservation and efficiency methods. And there are big choices to make.

At the end of the day, the next administration will have to decide to do something to keep the pipelines full and power lines energised. Or the pipelines and power lines will start to run down. And then the next president will have bigger problems on his hands than just deciding which of his friends to appoint as federal judges, or who gets what plum job.

What can the U.S. afford to do?

I've written before that the capital costs for energy projects have swelled in recent years. The costs for key inputs - steel, cement, copper, aluminum, machinery, labor - have outpaced inflation. And it won't all come to an end just because the Beijing Olympics are over. There's still a lot of concrete to pour in the Middle Kingdom.

So the world commodity boom will continue its long-term trend upward. And according to the latest data, the costs to build different kinds of power sources have increased dramatically. The relative changes are astonishing, if not sobering.

According to the U.S. Federal Energy Regulatory Commission (FERC), the capital costs of building power generation capacity in the U.S. in 2008 compared with 2003-2004.

The inflationary environment in power generation capital costs has impacted all types of systems. Nuclear has increased the most, because it uses the most steel and concrete. Costs for coal systems have increased quite a bit, as well.

At the same time, the fact is that coal and nuclear generate in excess of 60% of the U.S. electricity supply.

And much of the installed base is between 30-40 years old, with a significant amount even older. So this installed base of power generation systems is coming to the end of its design life. What will replace it? The U.S. had better figure that out now, because it will take the next 20 years (and more) to build the next generation of power systems and plants.

On the other hand, wind power has been affected to a lesser extent by capital cost inflation. Combined cycle and gas turbine combustion still remain cheaper than wind, but wind made up a lot of ground in 2003- 2004. These effects will play out over the next few years. These are things that neither the next president nor his policymakers can do anything about. They will just have to ride the wave.

And look at geothermal. It has become more expensive to build out geothermal capacity, but not that much more so. So geothermal is among the most competitive systems out there.

And on the surface, wind appears "cheaper" to build than geothermal. But that does not take into account that geothermal is far better for baseload power. That is, geothermal can supply power pretty much 24 hours per day, seven days per week. Wind, on the other hand, is limited to times when the wind blows. So it might take, say, three or four separate windmill sites to ensure 24-hour coverage, instead of one geothermal site.

We can only expect that fossil fuel costs will rise over the next few years. Really, who thinks that coal or oil will get cheaper? Rising fuel costs will further damage the economics for fossil-fired power generation, along with rising capital costs.

And despite the relative cost advantage for coal-fired power, the climate change debate is affecting the energy markets. Uncertainty about the future "carbon regime" is a key factor.

There are many questions. That is, will there be a "cap and trade" system on a national or worldwide basis? Both of the major party U.S. presidential candidates are discussing this. And cap and trade could manifest itself in many different forms. We might see national limits on carbon emissions. Or there could be taxes on carbon. (British Columbia already has a small tax on carbon. And what happens to small taxes? Yes, of course.)

In addition, the U.S. could enter into any number of treaties that set limits on overall carbon emissions.

What will this do to U.S. industry, both domestic and international? This is no idle musing, either. Large companies like General Electric are making extensive preparations for a future of limitations on burning carbon.

Even now, Americans are living with the effects of the debate over climate change. The prospect of dramatic carbon regulation has already altered the economics for the coal industry. In the past two years, we have seen numerous cancellations for proposed U.S. coal plants, from Texas to Montana to Pennsylvania to North Carolina.

At the same time, renewable power systems are a fast-growing industrial sector. But renewable power systems cannot in any way meet the scale of future demand in the near to medium term. The industrial infrastructure is just not there to build large numbers of basic systems for wind, solar and even geothermal.

Anyone who says America is going to do vast amounts of renewable this or that within the next four years just does not know what he's talking about.

So you can be sure that energy efficiency and demand control (higher prices and smart metering) are key near-term responses. That is, in locales where customers are exposed to fluctuating daily power prices, demand control is more likely via higher prices. In places where customers see relatively static pricing for energy usage, we can expect to see mandatory efficiency measures gain ground.

And if the next U.S. president does not get energy right, nothing else that he does will really matter very much.

Until we meet again,

Byron W. King
for The Daily Reckoning Australia

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