Saturday, February 27, 2010

Technology, Environment, and the Future of Natural Gas

Natural gas has long been one of the leading domestic energy sources for the U.S. economy. For a while, in the 1980s, it fell to third place behind oil and coal, but production is now on the rise again. By the end of 2009, natural gas was in a near-tie with coal for the lead in U.S. energy production.

Technology has been a major factor behind increased production of natural gas. In recent years, it has become practical to produce gas from "unconventional" sources once thought too expensive to tap. These include methane from coal beds, gas from shale formations, "tight gas" from other hard rock formations, and gas from extremely deep wells. Gas from unconventional sources now accounts for almost half of current production, and an even greater share of reserves.

There have been new developments on the demand side of the market, as well. One of them is an increased demand for low-carbon fuels. (Oil produces 37 percent more carbon per Btu than does natural gas, and coal 77 percent more.) Concerns about climate change have already led to increased incentives and regulations that encourage use of natural gas. If a comprehensive cap-and-trade scheme for carbon ever passes the Congress, natural gas will receive another big demand-side boost. Natural gas is not an environmental cure-all, however. Production from unconventional sources can have adverse environmental impacts of its own, including disposal of drilling wastes and ground water contamination.

On balance, the future of natural gas looks bright. The U.S. Energy Information Agency foresees an increasing role for gas over the next three decades.

Developments in the natural gas market make a good illustration of basic supply and demand concepts for your principles of economics course. To download a free set of PowerPoint slides on this topic, follow this link. If you find this material useful, please post a comment.

Monday, February 1, 2010

In GDP Data, Signs of Healthy Structural Change

Advance US GDP data for fourth quarter of 2009 were released at the end of January. They indicate that the economy grew at a brisk 5.7 percent annual rate, up from 2.2 percent in the third quarter. Even better news, behind the headline growth rate there were some signs of healthy structural change.

One such sign was continued strong growth of exports. Imports also grew, but the net export gap, as a percentage of GDP, remained much narrower than it was during the boom of the early 2000s. Many economists have pointed to unsustainable global trade imbalances, including both US current account deficits and Chinese surpluses, as one cause of the recent crisis. It would be good for global macroeconomic stability if these imbalances were to remain more moderate as the world economy recovers.

A second sign of welcome structural change was an uptick in the personal saving rate. During the housing bubble, personal savings had fallen to extremely low levels, as households went on a credit binge and borrowed heavily against home equity. Overstretched household finances are often cited as another cause of the crisis. True, at this point in the business cycle, some observers would welcome a spurt of consumption-led growth to further speed short-term recovery of GDP. However, stronger household balance sheets are arguably more important for long-run macroeconomic health.

Finally, government purchases of goods and services, as a percent of GDP, showed a small decrease in the fourth quarter of 2009. That may come as a surprise to anyone who has turned on the TV and listened to politicians and pundits carrying on about runaway growth of government. The explanation is that the nation's budget problems (which remain very real) do not stem from growth of government consumption expenditures and investment. Instead, they arise largely from continued imbalances between tax revenues and transfer payments, which do not show up in the GDP numbers. The larger problem of fiscal imbalances will be the subject of a later posting, after the President's budget message is sent to Congress.

Follow this link for a free set of PowerPoint slides showing highlights of the Q409 GDP data. If you find these slides useful in your economics classes, please give me some feedback in the form of a comment on this posting, or an e-mail.