Hedging, Natural Gas and National Security

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PACE Guest Blog By Captain Leo Goff, Ph.D., Captain, US Navy (Ret.)

Even when energy markets seem calm and stable, utilities use price and supply risk management tools such as hedging to maintain predictable fuel supplies and prices.  This is part of the obligation to serve and the duty to maintain reasonable prices for end-use electricity customers. Hedging natural gas, however, will become even more important over the next decade because of global market pressures and geopolitical concerns.

Over the next two decades the global energy landscape will change dramatically. The way the United States manages its vast energy resources in this new landscape will not only impact our national security, but will also impact the cost of energy to producers and consumers. Look for five major drivers of the changing energy landscape:

1) population growing from around 7.5 Billion to nearly 9 Billion, with the largest growth in India and Africa, thereby shifting the demand centers;

2) changing demographics with hundreds of millions moving from poverty to the middle class, especially in Asia and Africa, increasing energy demands exponentially;

3) continued pressure to move away from coal, heavy oil and other high carbon fuels to improve air quality and lower greenhouse gas emissions;

4) technological advances in electrical vehicles and electrification of much of the transportation sector – dramatically lowering oil demand and shifting the power requirement to stationary electrical power generation; and

5) technological advances in energy production, whether in fracking or innovations in low-cost, low-carbon renewable energy sources.

These five factors will combine to make our domestic energy mix much more complicated and the process of accurately predicting geopolitical winners and losers significantly more complex. Accordingly, the future of energy sources and pricing also becomes increasingly hard to anticipate and plan for properly.

We can be assured that total global demand for energy will increase by 50 percent over the next few decades. Technological gaps in storage will limit how much of the new energy baseload demand can and will be met with intermittent renewables like wind, solar or tidal. At the same time, the need to improve air quality, especially in China and India, will drive stationary power generation away from coal and fuel oil toward natural gas. The net result is that the global demand for natural gas will nearly double in the coming decades.

Russia, Iran, Qatar and other nations that do not share our values or our best interests are already positioning themselves to meet this rising demand for natural gas. At the same time, advances in fracking have made the U.S. the world’s leading producer of natural gas, able to supply more than our domestic needs and contributing to sustained low natural gas prices.

Geopolitically, the U.S. is now on a trajectory to supply many parts of the world with U.S. natural gas – including Europe and China. This will not only improve our trade balance, but it will hit the pocketbooks of Russia, Iran and other gas producers, while providing a physical energy hedge to our friends and allies.

U.S. natural gas exports and foreign dependency on U.S. natural gas will improve our diplomatic leverage while lowering the diplomatic victimization of Russia and others. Unfortunately, the more we export, the more U.S. domestic natural gas prices are tied to global markets – it is a double-edged sword.

An increasingly complex energy landscape with a higher global demand for U.S. natural gas makes the future price of domestic natural gas difficult to predict. Price hedging provides a means to protect consumers from an uncertain, complex energy future, and utilities must be allowed to continue this common-sense business practice.

Dr. Goff is a national security expert. He served for 30 years in the US Navy including command of a Nuclear Submarine. He now advises policy makers on energy, climate and geopolitics.