Row after row of drilling rigs and frack trucks now sit idle in parking lots across oil country. Drilling in U.S. oil and natural gas fields has come to a screeching halt. It’s a scene and reality that not only has ramifications for oil and gas workers and the oil market, but for electricity consumers as well.
As demand for oil has collapsed, drilling in the U.S. has followed suit. The U.S. drilling rig count – a good measure of activity in the oil patch – is down by more than half since this time last year and it continues to retreat. With new drilling drying up, so is new production. And it’s not just oil production that’s falling. A significant share of U.S. natural gas production – called associated gas – comes as a byproduct of oil production. As oil production goes, gas production is going with it. Falling associated gas production is coming alongside significantly reduced budgets and drilling plans from operators in America’s shale gas fields.
Reduced drilling plans and shrinking production mean one thing. S&P Global Market Intelligence wrote this week, “analysts are bullish on natural gas prices for winter 2021.” In short, expect rising prices and price volatility in the months ahead. This should be a sobering reminder of the need for dispatchable fuel diversity and balance in the energy sector.
Coal generation has so far taken the brunt of reduced demand for power in the early innings of the COVID-19 crisis, but the coal fleet remains critically important to ensuring a reliable and affordable supply of power in the years ahead.
The near-term conditions in the marketplace do not reflect longer-term needs. Already in Europe, with the curve bent and as businesses begin to reopen, electricity demand is beginning to show signs of recovery. That recovery will come here too.
It’s imperative that we don’t let near-term conditions further erode the fuel diversity and balance that has for so long insulated consumers from fuel price spikes. Historically, thanks to a balanced mix of fuel sources, as the price of one fuel would rise – such as natural gas – markets would turn to lower-cost options, to keep electricity prices in check.
Accelerating coal plant retirements – and the continued loss of nuclear power plants – has meant that we are increasingly putting our eggs in the natural gas basket. If volatility returns to the natural gas market and natural gas prices rise, consumers are going to feel it – at the exact time that so many Americans cannot afford any increase in their monthly expenses.
Fuel diversity has been an unsung strength of the U.S. energy equation. An IHS Markit study from 2017 found that the nation’s diverse mix of resources lowered the cost of electricity production by around $114 billion per year and reduced the variability of monthly consumer electricity bills by around 22 percent.
The lead author of that study wrote, “It is easy to take the cost-effective diversity of the current U.S. electric supply portfolio for granted.” We now have. That mix – at least the one heralded in the study – is gone. Dispatchable fuel diversity continues to erode. It’s imperative we don’t let this unprecedented near-term crisis accelerate a trend smart policy should have addressed years ago. Properly valuing a balanced, secure and affordable mix of power sources is clearly in the national interest. It’s past time steps are taken to actually do it.
- On April 29, 2020