November 14, 2006

November 14, 2006 | Commentary on Energy and Environment

Fixing the energy crunch

Could our nation's energy sector weather another Hurricane Katrina? 

There was plenty of discussion about that at the recent Energy Summit 2006, hosted by the Louisiana State University Center for Energy Studies. But whether or not Louisiana experiences another Katrina, participants in the two-day seminar agreed plenty of challenges face the nation's energy infrastructure. 

Katrina was a serious blow, but many speakers noted how effectively the industry responded. Numerous offshore oil and gas wells were hit by 170-mile-per-hour winds and 45-foot waves. As a result, gasoline prices had a record one-week jump of 46 cents after Katrina hit in late August 2005 and exceeded $3 per gallon by Labor Day. 

But repair efforts were swift. Enough capacity was brought back online that, by Week 2, prices had leveled off and began to decline. Even with Hurricane Rita causing additional damage a few weeks later, pre-Katrina prices returned by November.

Moreover, "there was no loss of life among energy sector workers, and not a single significant oil spill from any offshore facility" noted Michael Kearns of the National Ocean Industries Association. Katrina provided the industry with a real-world, worst-case test, and the industry did quite well. 

Nonetheless, Katrina did underscore the need for more domestic energy. The waters off Louisiana and Texas aren't the nation's only offshore areas with oil and gas, but they're the only such areas not under severe federal limits on drilling. There is energy in the Pacific, Atlantic, offshore Alaska and the eastern Gulf, according to Rory Miller, a vice president for Williams Field Services. However, these areas are subject to federal moratoria on energy production. 

If Washington were to change this policy and open some of these other offshore areas, America would not only enjoy greater production and lower prices but less vulnerability if any one region suffered a natural disaster. And the strong environmental record in Katrina's aftermath should provide confidence that additional drilling would be safe. 

When Katrina's onshore devastation knocked out several of Louisiana's refineries, domestic refining capacity was already at its limits. The ability to refine sufficient quantities of gasoline and diesel fuel was barely keeping pace with growing demand. No new refinery has been built in the U.S. since the 1970s, and regulatory costs and delays have hampered expansions at existing refineries. Several expansions are in the works, but as John Felmy of the American Petroleum Institute notes, they must run a lengthy regulatory and procedural gauntlet. Even modest changes to expedite the approval of additional refining capacity would help.

Hurricanes or no, America will need more energy, including natural gas. Indeed, in percentage terms, natural-gas demand has risen higher and suffered greater post-Katrina price volatility than oil. Homeowners, natural gas-dependent industries such as fertilizer and chemicals production, and the electricity generating sector all will need increasing amounts of natural gas. According to A. Michael Schaal of the Energy Department's Energy's Energy Information Administration, demand is expected to outstrip production.

Thus, beyond increased access to domestic natural gas fields, we also need to diversify via increased imports of liquefied natural gas. LNG provides a way to efficiently transport natural gas from parts of the world with excess supplies to the U.S. "More LNG receiving terminals and supplies are required to meet growing energy demand," said Bill Cooper, executive director of the Center for Liquefied Natural Gas. Provisions in last year's big energy bill will help, noted Mr. Cooper, but regulatory hurdles and local opposition must be overcome before LNG can meet its potential. 

Notwithstanding the weak 2006 hurricane season, Mr. Miller and others noted hurricane frequency runs in patterns and we're likely in the early stages of a period of increased storm activity. Katrina may have been unusually severe, but future hurricanes nearly as bad are inevitable, and the Gulf's energy sector will need to deal with large-scale damage again. And it will need to do so in the face of continued energy demand growth, which means even less cushion against price spikes.

In effect, hurricanes will make an already-challenging energy situation even more so. Now's the time to expand domestic supplies and build additional resilience into our domestic energy infrastructure -- to secure a more affordable and reliable energy future.

Ben Lieberman is a senior policy analyst at The Heritage Foundation (heritage.org), a Washington-based public policy research institute.

About the Author

Ben Lieberman Senior Policy Analyst, Energy and Environment
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Energy and Environment

First appeared in the Washington Times