Dr Gal Luft is co-Director of the Institute for the Analysis of Global Security (IAGS), a Washington-based thinktank focused on energy security. He is an adviser to the United States Energy Security Council and co-Founder of the Set America Free Coalition, an alliance of national security, environmental, labour and religious groups promoting ways to reduce America's dependence on oil. He specialises in strategy, geopolitics, terrorism, energy security, natural resources and economic warfare. He will be speaking at both the IAGS Roundtable and Gas Asia Summit during SIEW 2012.
Q1: There is ongoing debate in the US over energy exports such as shipping out shale gas and coal to countries like those in Asia. What is your view on the issue?
Dr Gal Luft: The shale gas revolution has freed sizable amounts of American coal and natural gas that are now available for export. The US is in a unique position to improve its trade balance and strengthen its international energy trade by exporting this surplus to Asia. I support increased US coal exports to Asia, particularly to China, which has recently turned into a net coal importer. The US already exports 10 percent of its coal production and its exports are at their highest level in 20 years. South Korea, Japan, India and China are among the lead importers of American coal. If natural gas continues to crowd out coal from the US electricity sector, there will be much more coal available for export. But in order for the US to increase its export capacity, new export facilities must be approved and built. This is difficult to do because environmentalists in the US oppose not only the building new export terminals, but also the expansion of existing ones. This is the biggest barrier to developing the coal export sector.
The situation with natural gas is even more complex. The lower 48 states of the US currently have no LNG export terminals. In the coming years, we are likely to see two to three LNG projects approved and constructed, and only at that point could the US become an LNG exporter. We are in the midst of a national debate about LNG exports: Should exports be allowed? If so, how much of the gas should be freed to export? What would be the impact on electricity prices and domestic manufacturing? What would be the benefits for the US economy and international posture, etc? I believe some exports are on the cards, but I don't see the US becoming a major player in the Asian LNG arena any time soon. More importantly, before rushing to export the gas, we ought to compare the economics of exporting natural gas as is with those of selling higher-value products made from that gas. For example, natural gas can be easily converted into oil alternatives such as methanol fuel, and hence, eliminate millions of barrels of imported crude. Such fuel switching could have more impact on the economy than exporting the gas as is.
Q2: You have suggested that the US government can insulate the economy from oil price shocks by reducing the strategic importance of oil to the transport industry. What are some immediate actions the US government can take to achieve this?
Dr Luft: The strategic importance of oil is derived from its virtual monopoly over transportation fuels. For the most part, vehicles sold throughout the world are made to run on nothing but petroleum. The single most important step the US government should take to break this monopoly is to require new automobiles to be open to fuels other than gasoline, or in other words, to offer consumers fuel choice. As long as cars sold in the US are shut to competitive fuels, Americans will never be immune from economically-devastating oil price hikes.
The natural gas glut that the US is facing provides a unique opportunity to shift some of the transportation fuel sector from oil-based fuels such as gasoline and diesel to natural gas-based fuels. Natural gas is a feedstock which can be used to power vehicles in multiple ways--it can be used to generate electricity and charge plug-in vehicles. It can be used in gaseous form onboard Compressed Natural Gas Vehicles or in the form of dimethyl ether (DME). It can be turned into a variety of liquid fuels (LPG, methanol, GTL diesel, etc.), and more. Each of those pathways has pros and cons. Some involve a higher premium on the vehicle side, others require costly infrastructure, and some are not cost-competitive except in high oil prices.
Methanol, for example, is significantly cheaper than gasoline on an energy equivalent basis. In addition to gasoline, it can power flexible fuel vehicles (FFV). These cars cost manufacturers an extra US$100 to make compared with a normal car. China is already blending 15 percent methanol (made primarily from coal in China) into its automotive fuel, and in recent years, 26 of its 30 mainland provinces have carried out testing and demonstrations of methanol fuel and methanol fuel vehicles. The economics of methanol are so favourable compared with gasoline that in China, illegal methanol blending has become rampant.
Fuel flexibility should be a standard feature in every new automobile, just like seatbelts or airbags. The uncertainty regarding future oil prices requires that, at the very least, our automobiles be open to some sort of fuel competition and that natural gas be allowed to compete against oil onboard our vehicles. At this year's Singapore International Energy Week, we will explore in a special roundtable discussion the various ways to use natural gas in the transportation sector.
Q3: The connection between the water challenge and the energy challenge is not as widely talked about as the challenge to cut carbon emissions. Why is this so and how significant is the energy-water nexus in your opinion?
Dr Luft: World governments are much more preoccupied with CO2 than with H2O, but our global water crisis is of no less importance than greenhouse gas emissions. The relations between water and energy are intertwined. We need energy to produce water and we need water to produce energy. Energy in the form of electricity, petroleum and natural gas is used to pump, process and desalinate clean drinking water. The more expensive the energy input, the more expensive the water will be. Conversely, many of the energy extraction and processing technologies, as well as most methods of power generation require plenty of water. Energy and water policies should therefore go hand-in-hand and support each other. If we want to have affordable water we must improve the efficiency of its use. But at the same time we should ensure affordable energy to increase the availability of drinking water. Policies such as carbon tax that raise the cost of energy may condemn part of the world to even worse water scarcity.
Q4: There has been talk of offshore wind energy as a golden opportunity for the US. What are the challenges of harnessing wind energy and other renewables to power the US?
Dr Luft: In recent years, partly due to cost improvements, non-hydro renewable energy (primarily wind, solar and geothermal) has gained a growing foothold in America's electricity fuel mix accounting for nearly 5 percent of US electrical generation in 2011. According to the US government, this share will increase to more than 12 percent in 2035. But renewable energy faces three major problems today, which could prevent it from conquering a significant part in the nation's energy basket. First, the shale gas revolution has lowered natural gas prices to under US$3/mmbtu, imposing a real challenge to the economic competitiveness of renewable energy. Second, and this is a problem throughout the industrial world, the pool of money available to governments to subsidise and incentivise renewable energy is shrinking. Third, without grid storage capacity, as much as two-thirds of the renewable energy generated is wasted.
What's the point of generating so much energy if so much of it is dissipated? All three challenges will take years to resolves themselves and will weigh heavily on the development of renewable energy.
Q5: Several countries, including Japan, have embarked on efforts to reduce their dependence on nuclear energy. What impact do you foresee from the shrinking significance of nuclear energy in the global energy mix?
Dr Luft: Like other sources of energy, nuclear power poses some challenges, but we must be very careful not to overreact in our response to Fukushima. With all its pitfalls, nuclear power is still the only significant source of non-fossil base load power electricity. Paradoxically, the very same people who are concerned about greenhouse gas emissions are the first in line to bash nuclear power and call for its demise. Japan's decision to eliminate the use of nuclear power is a strategic error which the Japanese are likely to regret. Japan has no domestic energy sources to fall back on and high energy costs will severely harm the struggling Japanese economy and its industrial base. To replace nuclear power, the Japanese will have to increase their reliance on polluting coal (many more people die from pollution-related diseases than from nuclear accidents), expensive LNG or even more expansive and mostly intermittent renewable energy.
The Japanese people are innovative and determined and I would be happy if they manage to surprise the world. But one should not forget that the Japanese government is deeply in debt and it's hard for me to see how it can endure the heavy cost associated with such a significant shift from nuclear to renewable power.
Instead of killing the nuclear industry we should focus on improving it by introducing safer designs and new approaches to dealing with nuclear waste. Unfortunately, the actions of countries like Japan and Germany are instilling a sense of uncertainty about the future of nuclear power, and this creates brain drain from the industry. If we drive away young people from studying nuclear engineering, we will not have the skilled labour needed to design, construct and maintain the next generation of nuclear power plants, and the nuclear industry will continue to decline. Bidding farewell to nuclear power at a time that no other alternative can be scaled economically is a highly imprudent move.