Volume 8 | Issue 6 | Year 2005

Our nation is rebuilding after Hurricanes Katrina and Rita. Thankfully, people are returning to their homes and to their jobs. But the destruction from the hurricanes had a deep impact. As the storms slammed into our coastlines, they damaged our energy infrastructure in the Gulf of Mexico, cutting national supplies. Today, about half of the energy production in the Gulf region is still shut down. Underwater pipelines, including critical chokepoints where gas comes in from different wells, are broken, awaiting repairs.
These problems are symbolic of a larger national issue. Hurricanes Katrina and Rita exposed fundamental weaknesses in our energy infrastructure and supply that threaten our economy and our nation’s future. We’ve started to see the immediate impact of these weaknesses on energy prices.

We’re paying close to $3 a gallon for gasoline. Consumers will pay 48 percents more for natural gas service than last year and at least 31 percent more for home heating oil. The average household heating bill will top $1,000 for the first time this winter. In some parts of the country, like Michigan, those figures could be much higher.

For manufacturers, the problems are magnified. Dow Chemical’s plastics plant in St. Charles, La. – a 2,000-acre city of pipes, steel towers and spherical holding tanks – uses about 100 billion Btu of natural gas every day. That’s enough natural gas to heat 1,000 homes for a year. The St. Charles plant produces a range of man-made compounds needed to make everything from shampoo to plastic cups to house paint to polyester shirts. We don’t even think about these compounds, but they are essential to make the products we use every day.

Every time natural gas prices go up a dollar, costs at that chemical facility go up about $100 million per year.

It’s not that the Dow plant isn’t conserving energy. It has cut its usage per pound of output by 22 percent in the last year. The plant has also laid off over a quarter of its workers.

And that story is typical. Every time the price of oil, now at $60 a barrel, goes up another dollar, it costs another NAM member, Goodyear Tire, $20 million. Goodyear is cutting production 30 percent this year.

That’s not good for our economy. It’s not good for job creation. And it’s affecting prices already. Food Lion, the grocery chain, is spending an extra $24,000 per day because the cost of plastic grocery bags has gone up. The American Baker’s Association says the cost of making bread is going up sharply.

At the NAM our phones are ringing off the hook with stories like these. The president of aerospace supplier Ace Clearwater Enterprises in Torrance, Calif., Kellie Johnson, said her natural gas bills were about $9,000 per month a year ago. Now they’re $14,000. And they’re climbing.

The price of U.S. natural gas, which was approximately $2 per million BTUs only six years ago, was $6 by February of this year, rose to $10 in the days just prior to Hurricane Katrina – and then jumped to $12 when Katrina struck the coast.  It’s now about $14. That’s the equivalent of paying $7 a gallon for gasoline.

We’re paying the highest natural gas prices in the world. The cost of natural gas in Saudi Arabia, for instance, is about one-twentieth what it is in America.

Dow Chemical’s CEO Andrew Liveris said these prices “render the U.S. chemical industry, which uses natural gas as both a fuel and a raw material, simply uncompetitive with the rest of the world.”

Vulnerable to the weather?
One of the problems is that our natural gas supplies, unlike our oil supplies, come from domestic sources that are extremely limited. About 84 percent of our natural gas comes from U.S. sources. When the supply or the infrastructure is disrupted, as we saw during the hurricanes, we simply don’t have adequate diversity or quantity in our energy supply to weather the storm. As Alan Greenspan said recently, the disruptions caused by the hurricanes were “an accident waiting to happen.”

Chairman Greenspan went on to ask, “How did we arrive at a state in which the balance of world energy supply and demand could be so fragile that weather, not to mention individual acts of sabotage or local insurrection, could have a significant impact on economic growth?”
It’s a good question. Here are statements made by our national leaders in recent years:
“The nation’s growing reliance on imports threatens the nation’s security because it increases U.S. vulnerability to oil supply interruptions.” That was 10 years ago.

“It’s obvious that the federal government was not prepared. We were caught napping. We got complacent.” That was five years ago. (New Mexico Gov. Bill Richardson, 2000).
“Prices are still unacceptably too high, we are working vigorously to bring them down. We need to take some steps and Congress needs to take some steps.” Again, five years ago. (Richardson, 2000).

Those statements were all made made by the President and his Energy Secretary – during the Clinton Administration.

And how about this one? “We need to shift to plentiful coal…and nuclear energy.” That was Jimmy Carter, back in 1977.

So what happened?
We haven’t built a refinery in this country since 1976. The last nuclear plant was approved in 1979.

Meanwhile our energy use has increased. As our economy has grown over the past decade, our energy consumption has increased by more than 12 percent. But our domestic production has increased by less than one-half of 1 percent.

Despite increased efficiency, our energy production has not kept up with energy use. And it’s putting a tremendous strain on our economy. In the last five years, the U.S. chemical industry went from posting the largest trade surpluses in the nation’s history to becoming a net importer. The industry lost $50 billion to overseas competitors and 100,000 well-paying U.S. jobs. Dow Chemical alone shut down 23 plants in the United States.

New jobs and factories follow low energy prices. Of 120 large chemical plants being built in the world today only one is in the United States.

Meanwhile, our competitors haven’t been sitting still. While this country built one single nuclear power plant, France built 58. Today, France gets more than 78 percent of its electricity from safe, clean nuclear power – four times as much as we do. France exports energy to the rest of Europe, and beyond.

China is investing $50 billion to build 30 nuclear power plants by 2020. While Japan has 23 liquified natural gas terminals to ensure steady supply of natural gas, the U.S. has only four. That’s infrastructure. As Alan Greenspan said: “If North American natural-gas markets are to function with the flexibility exhibited by oil, unlimited access to the vast world reserves of gas is required.” Markets, he said, need to be able to effectively adjust to unexpected shortfalls in domestic supply.

But it hasn’t happened, because we don’t have the energy infrastructure. Today, there are 60 proposals for new LNG terminals making their way through government channels. Only a handful is expected to get through the bureaucratic process.

One proposed terminal has been held up in the Gulf because environmentalists say the project’s use of seawater to reheat the liquefied gas will kill fish eggs. The company trying to build the plant says the impact will be insignificant. If that terminal were in place now, there would be 28 billion cubic feet of gas stockpiled – almost 10 percent of the cumulative gas production lost so far to the storms, according to Interior Department statistics. But the project is in bureaucratic deadlock.

This problem threatens our entire economy. Nobody in Beijing or Brussels is holding us back when it comes to energy. We need to take action ourselves. Right here in America, right here in Washington, D.C.

Energy Bill – a good start
The Energy Bill enacted this summer – the first comprehensive energy strategy in 30 years – was a good start toward building the infrastructure and supply we need.

It gives the Federal Energy Regulatory Commission (FERC) the lead in siting of LNG facilities, streamlining the process. It expands types of facilities excluded from detailed environmental study. It provides financial incentives for expansion and construction of refineries. It provides some financial incentives for natural gas distribution and electric transmission. It offers production tax credit, loan guarantees, liability protection and $1.8 billion toward new advanced nuclear power plants. It offers tax credits, loan guarantees, loans and direct grants for clean coal technology.

But we need to do more.

First, we need to develop our oil and gas resources in the Outer Continental Shelf. The Outer Continental Shelf is the name given to the federally controlled lands submerged offshore from states. Currently, 85 percent of all federally controlled coastal waters are off-limits to energy production.

Access to the energy rich OCS was restricted by the federal government nearly half a century ago, when the nation’s energy landscape was entirely different from what it is today. Back then, the U.S. had an adequate energy supply and there was not an urgent need for additional exploration and production.

The OCS has over 420 trillion cubic feet of technically recoverable natural gas resources – enough natural gas to heat 100 million homes for 60 years, and enough oil to drive 85 million cars for 35 years.

Congress should lift federal restrictions that prevent states from developing these resources. Doing so would:
• increase much-needed domestic energy supplies and reduce prices;
• allow states to control their offshore energy resources;
• allow coastal states to benefit from energy development by sharing royalties, resulting in hundreds of millions of dollars in local revenue.

Congress should also increase onshore access to oil and gas by allowing exploration and development in the Arctic National Wildlife Refuge (ANWR).  ANWR is the largest single untapped source of American oil.  The U.S. Geological Survey estimates that it contains 5.7 to 16 billion barrels of recoverable crude oil.  ANWR could provide nearly a million barrels per day, every day it is in operation, for several decades. This drilling would occur on only 2,000 acres of ANWR’s 19 million acre expanse and only during the time of year when the ground is frozen. That’s an area roughly the size of Dulles Airport compared to the state of South Carolina.

Congress should expedite the permitting process for liquefied natural gas contained in the Energy Policy Act of 2005:  Currently there are about 40 proposed LNG terminals before the Federal Energy Regulatory Commission or being discussed by the LNG industry for North America. As I mentioned, only five terminals are operating in the United States.
Congress should remove obstacles to building new refineries:  No oil refineries have been built in the United States since 1976.  Since 1981, with the removal of refinery subsidies, the number of oil refineries has decreased from 315 to 144 at the end of 2004.  The decrease in refineries can also be traced to the environmental restrictions in the Clean Air Act Amendments of 1990.  The operating costs of meeting these regulations became too high for many smaller refineries, which had to shut down.

We need to develop cleaner nuclear energy. Nuclear energy is a secure energy source that the nation can depend on. Unlike some other energy sources, it is not subject to unreliable weather or climate conditions, unpredictable cost fluctuations, or dependence on foreign suppliers. It produces no controlled air pollutants, such as sulfur and particulates, or green house gases.

Nuclear energy played an important role in the sustained economic growth during the 1990s. By operating more and more efficiently, our nation’s nuclear power plants have added the equivalent of 25 1,000-megawatt power plants to our nation’s electricity grid.
According to the Department of Energy, the demand for electricity is expected
to grow by 50 percent by 2020. In order to continue producing at least one-third of our total electricity generation from emission-free sources, we must build 50,000 megawatts of new nuclear energy production.

A powerful block
Nuclear power is a reliable, clean source that is essentially an American invention. We generate nearly a fourth of the world’s total nuclear power and we can do so with domestic energy sources. Nuclear power is one of the most promising ways that we can produce hydrogen economically and efficiently.

Some of our states are already benefiting greatly from this clean source of American power. Vermont generated 74 percent of its percentage of its electricity from nuclear energy in 2003. Connecticut, Illinois, New Jersey and South Carolina rely on nuclear energy for more than half of their electricity.

One of the greatest obstacles we face to building new energy plants is regulatory uncertainty that discourages new plant construction. Since the 1970s, more than 35 plants were stopped at various stages of planning and construction because of bureaucratic obstacles. It’s no wonder, then, that the industry is hesitant to start building again. If I’m going to go through a 10-year permitting process and a 10-year construction phase to build a power plant, I need to know that our regulations are stable. We must provide greater certainty to those who risk capital if we want to expand a safe, clean source of energy that will make us less dependent on foreign sources of energy. That’s what Clear Skies would do.

EPA’s complex and outdated New Source Review program constitutes one of the most frustrating obstacles confronted by industry when it attempts to expand or upgrade a power plant, refinery or factory. Established in 1977, this permitting program triggers a years long review process of the environmental impacts that may arise when a stationary source of air emissions attempts to upgrade its technology or expand its operations. The program results in unnecessary delays that not only hinder economic growth, but may also result in degraded air quality, because of the delay associated with installing advanced, environmentally sound technologies.

Attempts to reform NSR date back to the Clinton Administration and met with little success. The current Administration has issued two rules that would attempt to clarify regulatory definitions for “routine maintenance,” thereby clarifying exemptions for the review process. We have seen the reformed rules tied up in the court system. Earlier this month the Bush Administration issued another proposed rule that would attempt to streamline the program, and the NAM intends to comment on that proposal. However, even if the Bush Administration issues a new rule following recommendations from manufacturers, it will likely be challenged in the court system.

Clear Skies legislation, and vehicles being considered by Rep. Barton, (Rep. Joe Barton, R-Texas) can address the challenges posed by NSR and reform the program in a meaningful way that will take the debate out of the courts, and provide an atmosphere of predictability for those making significant capital investments.

Our country has always responded to challenges because we’ve got people with such great imaginations and such drive and such determination. Twenty-five years from now, people are going to look back and say, “I like my hydrogen-powered automobile – and I produced a little extra energy this year from my home. Our farmers are going to be saying, “You know, the crop’s up, and we’re less dependent.”

In our challenges lie our opportunities. Now is the time to put our strategy in place for future generations, to create jobs and keep our economy strong. Now is the time to POWER America.

Michigan Governor John Engler is president of the National Association of Manufacturers, whose mission is to enhance the competitiveness of manufacturers by shaping a legislative and regulatory environment conducive to U.S. economic growth and to increase understanding among policymakers, the media and the general public about the vital role of manufacturing to America’s economic future and living standards. Visit: www.nam.org.

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