Monday, November 14, 2005

Complacency and Conservation

For Americans my age and older, "energy conservation" conjures up images of President Carter appearing on TV in a sweater, as noted in this business op-ed from Sunday's New York Times. However awkward those efforts might have been, then, serious conservation behavior is appropriate again, at least for the next several months. We are in a brief, seasonal trough between two different energy crises, and it would be natural to become a bit complacent. But rather than easing up on our conservation efforts, this is just the time to put them into high gear, to avert the worst of the energy problems that winter could bring.

When the hurricanes clobbered the gulf coast this summer, they hit the refining industry as it was preparing for the end of the peak driving season and the onset of the annual transition to maximum heating oil production. In order to mitigate the resulting gasoline shortfall, refineries continued to flog gasoline production much later into the year than normal, at the expense of diesel fuel and heating oil. This is why diesel prices have fallen much less than gasoline prices have in recent weeks, and inventories of diesel and heating oil are unusually low going into winter.

In parallel with the heating oil shortfall, the hurricanes shut in about 10% of US natural gas production. 4 billion cubic feet per day of gas remains offline at this point, but inventories in storage are at about seasonal norms, due to the reduction in industrial demand resulting from high prices and hurricane damage. But that shouldn't promote over-confidence; gas inventories would have to be exceptionally high to compensate for both high winter demand and production that remains 7% below average.

All this suggests that while gasoline prices have retreated to their lowest levels since before Hurricane Katrina hit, we face an even tougher problem with heating fuels in the months ahead. And as unglamorous as it may sound, the only factor that can make a difference at this point is conservation. There's no extra production that can be brought online. There's no flood of imports waiting to save the day, as there was for gasoline. A little belt tightening now could pay big dividends when the weather gets cold.

The kind of conservation I have in mind has nothing to do with driving less, unless you own a diesel car. It's as simple as turning off unnecessary lights, waiting to run the dishwasher until it's full, and turning off the power strip--not just the pc--when you're done with it. Saving electricity saves natural gas, because 42% of the gas we use goes to generate electricity. And saving gas now frees up more to go into storage, for use in January and February.

Not only would immediate conservation ensure that there'll be more gas when we really need it, but it would also cut our gas and power bills, as part of the normal market "feedback loop." We normally focus on the other part of this cycle, in which high prices reduce demand, which in turn reduces prices, but you can jump into this loop anywhere. Voluntary conservation works just as well as the price-motivated kind, even though it's harder to explain to economists.

If you can look around your home or office without finding easy ways to save 10% of your electricity use, I'd be surprised. The aggregation of 200 million consumers doing that could bring natural gas prices down by several dollars per million BTUs, now, and shave a comparable amount off the winter peaks, later. What are you waiting for?

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