Whatever one thinks about shale gas today — we worry about its environmental consequences — there’s no denying the extraordinary economic return on taxpayer investments. Shale gas is likely to allow the United States to go from net gas importer to a net gas exporter over the next decade.The details of government innovation policy matter a great deal of course, as such policies can lead to success or failure. And the consequences of innovation are often themselves disruptive and may require actions in response.
While details vary, the story is basically the same for nuclear power, natural gas turbines, solar panels, and wind turbines — pretty much every significant energy technology since World War II. That’s because the private sector alone cannot sustain the kind of long-term investments necessary for big technological breakthroughs in the midst of volatile energy markets and short-term pressure to produce profits.
No doubt, government energy innovation investments could be made more efficiently and effectively. But it would be a mistake to imagine that we’d be better off without them.
Any effective approach to innovation will move beyond the simplistic debates that spring up over whether the government or the private sector is the source of all that is good and the other is the source of all that is evil. Both have important roles to play.
Comments welcomed on this post on the the details of the S/N op-ed, technology of shale gas and specific innovation policies. But please take generalized arguments for or against government or the private sector elsewhere, Thanks!
16 comments:
If you believe that the equilibrium state of any long-established agency is to be captured by industry lobbyists, the research is likely to be focused on sustaining (as opposed to disruptive) technologies.
I'm rather skeptical that most government sponsored applied research pays off at the same rate that industry sponsored applied research does.
It also seems that the horizontal drilling is a sustaining technology development. I'm not sure how much funding was provided by government here, but it's hard to see that it was critical to the success of the shale gas situation.
Net/net, I'd like to see a more rigorous analysis on ROI. This smells a bit like typical Washington PR.
What I noted that the Dept of Energy spent $24 billion dollars from 1978 to 2007 on fossil energy development. So that averages to less than $1 billion a year. During this time, Synfuel Corp was conceived, started and ultimately died and probably got the largest portion of the DoE funding. I would be curious about just how much funding George Mitchel, the shale gas pioneer, really got. I bet it was not more than several million dollars. Perhaps this suggests that funding many small, very high risk projects to help overcome technical barriers may make some sense. But I suspect having DoE throw billions of dollars a year at technologies already well in commercial development to get economies of scale may end up not generating the much return on investment at all. I also suspect no one at DoE would have even dreamed of how disruptive unconventional gas would be to the energy marketplace where the cost per BTU dropped by 2/3.
While plaudits are no doubt due to DoE and the US government, there is a much more effective strategy that the US could adopt if it is really concerned about energy security.
All it has to do is to guarantee to emerging non-conventional energy projects (oil shale, green sands, coal to oil conversion etc) an offtake price of, say, $75 per bbl for, say, 20 years. This guarantee will enable non-major companies sponsoring these projects to secure funding to develop.
The major obstacle to developing projects is finance (assuming enviro issues away for the moment) since the alternative projects are capital intensive, and financiers were spooked by what happened last time they enthusiastically supported such projects (the oil price fell to as low as $10 due to overproduction and there were many financial failures).
A likely outcome of the strategy I suggest is excess production again, with a depressing effect on energy prices. However, given the level of prices over the past few years, I think that the US consumer can live with that.
Clearly mechanisms would have to be developed to deliver the guaranteed price, but there are ways to do that.
The article seems way too one sided. It is written by two Bay (read Berkeley) area liberal/environmentalists. They may be a little iconoclastic in their writings, but they are what they are. You would expect them to take this position. Unfortunately to develop a counter argument you would have to be privy to corporate oil & gas E&P research for the last 30 years.
Anyone know how much money was invested by DOE in these projects?
right now in the real world shale gas is running at about $6.75-$7.00 per Mcf all costs included which is leaving lots of little bankrupt companies in its wake
and they cite daniel yergin as well LOL, that guy has a pretty piss poor track record
That sound you hear is the libertarian Pielke readers' heads exploding.
-#1 - borepatch
"If you believe that the equilibrium state of any long-established agency is to be captured by industry lobbyists, the research is likely to be focused on sustaining (as opposed to disruptive) technologies."
I had a bit of a hard time understanding your meaning there - but if I get it right, then I think I disagree. To the extent that lobbyists are involved in research, it is focused on profits. Sometimes it is focused on sustained profits, and sometimes it is focused on short-term profits. I'm not sure what you're referring to by "disruptive" there, but lobbyists care only about profits, and oft' times, that means short-term profits that are in opposition to long-term sustainability, negative impact to the general economy (short or long-term), and completely in line with disruptive phenomena such as pollution or military interventions to ensure the flow of oil.
The interest of lobbyists is not driven by disruption or short-term interests per se, but to a large degree independent of those considerations if profits are to be had.
While federal programs certainly played a role in laying the ground work for the current shale gas revolution, the $24 billion funding level for fossil research cited by Shellenberger and Nordhaus -- and their casual observations that “billions” more spent through GRI and tax credits -- gives the reader a mistaken impression of the actual government contribution to shale gas technology development. Chapter 8 of the “Future of Natural Gas” study published this year by the MIT Energy Initiative contains a discussion of the role of historical government and institutional RD&D expenditures directed towards natural gas. (Greater detail on historical federal RD&D spending is provided in Appendix 8.A.)
Table 8A.1 in the Appendix, indicates that total DOE expenditures on natural gas RD&D were slightly more than $1 billion for the 32 year period 1978-2010. However, at least 40% of those expenditures were directed towards gas storage, transmission and conversion – including advanced turbines, leaving no more than 60% potentially directed towards shale gas RD&D over the 32 year period. Figure 8.2 on page 163 of the main report provides greater detail about specific expenditures directed towards shale gas. That figure shows the combined annual spending levels for DOE and GRI on Shale Gas RD&D for the period 1978-1993. Spending totaled approximately $225 million, with roughly an equal amount from a time-limited tax credit that was available for wells drilled from 1980 to 1992.
Given available data, it is misleading to use recent shale gas developments as an argument in support of federal/public funding of technology development -- particularly when only a small portion of the $24 billion of funding that the authors cite was actually directed towards shale gas technologies. Alternatively, it does raise the question, “What did the DOE receive for the vast majority of the $24 billion spent on fossil research?”
- 8 - whb
"Given available data, it is misleading to use recent shale gas developments as an argument in support of federal/public funding of technology development -"
The other points you make notwithstanding, I don't see the logic behind that statement. The Post article describes government funded/conducted research efforts (drilling and mapping techniques) and subsidization that seem to have been vital to the development of that technology.
Also, are the figures cited in the MIT study adjusted for inflation?
re 1 - Borepatch wrote
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If you believe that the equilibrium state of any long-established agency is to be captured by industry lobbyists, the research is likely to be focused on sustaining (as opposed to disruptive) technologies.
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This the point of Christiansen's book and issue fo innovation in the private sector. The problem is that innovation is disruptive to the value chain of the established interests in a firm or industry. There is a large business literature on innovation and methods of how innovative ideas can be protected from the established interests within a company. For example, it can either be sponsored by someone with a great deal of institutional power or spun off in to a separate company
Either way, the innovation will not come from within the people within the current structure
Joshua –
My logic was not that government RD&D wasn’t vital to shale gas development. Rather, it was the way the authors tied the $24 billion in “fossil energy” research expenditures (which was the only dollar value cited in the article) to shale gas development. The authors encourage the reader to accept the argument that $24 billion in federal monies was well spent – given what we are now seeing from shale gas development. The authors would like you to believe that large federal programs/expenditures create large benefits for the economy. However, if the reader realizes that it was a very small public expenditure that was well spent, then the authors are left with the need to explain whether or not the remaining $23+ billion was as well spent. And, if there is the possibility that 97% of federal fossil energy research expenditures may not have been as well spent (i.e., cannot be linked directly to positive outcomes like shale gas development), then there is a much weaker argument for federal research expenditures. I realize that the authors could use this data to argue that small amounts of well-targeted federal research expenditures are highly beneficial. But, that was not the argument that was made.
The $1 billion from Table 8A.1 in the Appendix was in current dollars, while the $225 million based on Figure 8.2 was in 1999 dollars.
I don't see where the government taxed hydro power to fund innovation in gas drilling technology, or subsidized shale gas furnaces in homes.
Subisdizing solar panel installation on houses or wind turbine installtion in Nantucket Sound has nothing to do with innovation, but that's where our money is going. Solyndra and Evergreen Solar did their own research, which failed the market as soon as it got there. The subsidizing of Solyndra and Evergreen Solar had nothing to do with innovation - it was done to claim 'green jobs' for politicians.
Any innovation research should follow the shale gas model, building on existing technology. What we have now is mostly dumping money on technology that doesnt work. Its like the government giving citizens money to buy Chrysler cars when Toyota and Honda and Ford are better. It 'works' in a perverse sense, but it doesn't work.
- #11 - whb
Please note, I did write "your other points notwithstanding."
An interesting hindsight study to pick over and see how much government influence can be attributed to the modern rise of shale gas exploration. Of course in a free market if there were absolutely no cross over between government and independent enterprise then that would be a more striking think to show I would have thought.
With each of the examples of technological or funding overlap found by Michael Shellenberger and Ted Nordhaus, I wonder if there is an associated example of someone who would had known it would be just one of many starting tendrils on the way, and leading to, to such a game changing single energy breakthrough today?
Of course you still have to wonder how this compares exactly to the likes of the recent showy Solyndra splurge, with its attendant grandiose announcements, were a great huge expensive tree trunk is plonked in the ground and is left to die in front of our eyes ;)
I fear that the authors of the article are drawing the wrong conclusions from the shale gas example.
What I get from the article and other data is that the federal government was instrumental in providing the funding and infrastructure for technology development of shale gas extraction.
The Solyndra spending, however, was primarily for production. A solar line costs in the order of $400 million to build - it is easy to see where most of Solyndra's loan guarantees were being spent.
Thus it would seem that the government is well suited to providing financial and other support for otherwise highly risky technology development, but in turn has poor capabilities for identifying successful productization of technology.
In addition to the Washington Post op-ed, the Breakthrough Institute has just published the results of an investigation charting the decades-long support the federal government provided to the gas industry, from massive hydraulic fracturing and the Eastern Gas Shales Project in the 1970s, through the 1980s with the Section 29 unconventional gas tax credit and DOE's first demonstrated multi-fracture air-drilled directional well, to the 1990s with microseismic imaging tools and direct financial support for Mitchell Energy in their first horizontal well. Follow this link to view the results of our investigation: http://thebreakthrough.org/blog/2011/12/new_investigation_finds_decade.shtml
As Dan Steward, former VP at Mitchell Energy, put it, "[DOE] did a hell of a lot of work, and I can't give them enough credit for that. DOE started it, and other people took the ball and ran with it. You cannot diminish DOE's involvement."
The history is clear: the natural gas industry as we know it today relies heavily on technological innovations and techniques pioneered over several decades by the federal government. The partnership and support of the government does nothing to diminish the valuable R&D, exploration, and risk-taking performed by Mitchell Energy. As with microchips, cellular technology, the Internet, jet turbine engines, and nuclear power, the story of natural gas is another example of the private sector taking blockbuster government innovations and turning them into a highly profitable and successful industry.
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