Why Natural Gas Problems Loom

By Merline, John W. | Consumers' Research Magazine, March 2001 | Go to article overview

Why Natural Gas Problems Loom


Merline, John W., Consumers' Research Magazine


This past winter, millions of consumers got a particularly nasty reminder of how free market forces work--in the form of unusually large natural gas bills in their mailboxes. The U.S. Department of Energy estimated that heating an average home in the Midwest would cost $834 this winter, up from $540 the year before. In the Washington, D.C., area, prices more than doubled. Between 1998 and 2000, natural gas prices rose 144%.

The reason for all this was fairly simple, and dates back to a couple years ago when natural gas prices hit rock bottom. Those extraordinarily low prices led to a cutback in exploration and drilling of new gas supplies. At very low prices, companies couldn't make much money from these activities. And because it takes time for new supplies to emerge, only now are gas supplies beginning to increase. By the summer of 1999, just about 400 natural gas rigs were in operation. Today, that number exceeds 800.

At the same time, homes hit with this winter's sizable gas bills have cut back on consumption. In other words, the market has worked just it was supposed to. High prices encouraged supply while limiting demand, and eventually this combination will bring prices back down. Already, the Energy Department forecasts prices next November to be 25% lower than they have been this winter.

In the meantime, it is notable that there was no concern about a natural-gas supply shortage. When prices spiked, gas companies did not have to cut back on service to consumers--a fact that stands in stark contrast to the electricity situation in California, where state-government-imposed price controls have wreaked havoc on electricity markets, leading to brownouts, blackouts and serious concern about the future of the electricity supply. (See "A Lesson from California".) Thus, despite the short-term pain, the current natural gas situation serves as a testament to the benefits of allowing the marketplace to set prices commensurate with supply and demand.

However, problems with natural gas loom over the long term. Natural gas consumers face the prospect of high prices in the future, due not to market forces but to a set of skewed government policies that seek to push up demand while keeping off limits vast supplies of natural gas that could meet this demand. Unless this situation is changed, a supply shortage could emerge that would push up prices permanently.

Encouraging Demand. Over the past few years, governments at all levels have encouraged the use of natural gas, for two good reasons. First, almost all the natural gas the United States consumes is produced domestically. Just 16% is imported, and most of that comes from Canada. And this situation is unlikely to change. Unlike oil, natural gas cannot be transported easily over the ocean since it must be liquefied first. Domestic supply--and supply from nearby countries--is essentially tapped from underground reservoirs, piped out and sent on its way to businesses and homes along a vast array of underground pipelines. Encouraging the use of natural gas, therefore, helps cut dependence on oil, almost two-thirds of which is imported.

The second principal reason natural gas is popular is that, compared with other major sources of energy, natural gas is far less harmful to the environment. It produces about half the smog-forming nitrogen oxides of oil, per unit of electricity generated, for example. It emits almost no sulfur dioxide or soot. Advanced natural-gas cars cut carbon monoxide emissions 83% compared with conventional, gasoline-powered vehicles. And natural gas produces just half as much carbon dioxide--one of the principal "greenhouse gases"--for each unit of energy as coal, and almost a third less than oil. A 1999 report from the U.S. Department of Energy made clear that if the United States hopes to reduce its emissions of greenhouse gases in an effort to combat what some scientists believe is a global warming threat to the planet, natural gas consumption will have to increase dramatically over other forms of energy. …

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