Turnaround in Natural Gas

THE THREAT of a critical shortage of natural gas seems to have receded. Instead of curtailing supplies to some consumers, gas distributors are again accepting and even advertising for new customers. Instead of calling for emergency gas conservation, government officials are suggesting that, temporarily at least, gas be used to displace imported oil. Instead of headlines forecasting disaster because gas is unavailable, the press reports that gas is going unsold in the field markets.

What has caused this remarkable turnaround?

A partial answer is that the blackest headlines of the past few winters reflected extraordinary heating demands. The school closings and other emergency measures were caused by extreme weather, not by underlying supply—demand imbalance, and, despite added storage, could recur.

The second and more intriguing response is that major changes, mostly due to economic incentives, have taken place in the natural gas industry.

• First, gas supplies have not fallen as much as some anticipated. The price of natural gas rose rapidly in the unregulated intrastate field market following the 1973-74 OPEC price increase. It jumped in the regulated market with decisions of the Federal Power Commission in 1974 and 1976, and will rise more under the new gas legislation. As a consequence, drilling increased—footage drilled almost tripling since 1970. More gas was brought to market than many were planning for, and the prospect is that the decline in production may be near an end—at least for a while.
• Second, higher gas prices, the prospect of still higher prices in the future, and the greater consciousness of opportunities for conservation have reduced the amount of gas used in meeting specific wants. Residential thermostats were turned down and houses were insulated. Adjusted for degree days, residential consumers lowered their use of gas for space heating by about 15 percent as compared with the 1967-1972 average. In businesses, better temperature control systems were introduced and steam leaks repaired.
• Third, the industrial market is shrinking. The actual and threatened curtailment of supplies to industrial customers made many of them seek alternative fuel supplies. The high costs of closing down have made them willing to pay a premium to get a reliable source of energy, and as it becomes available, they withdraw from the gas market.

These effects of shortages were reinforced by regulations banning future gas consumption in some uses (electric utility fuel, for example) and by the incremental pricing provision of the 1978 Natural Gas Act which promises higher future gas prices for industrial consumers.

• Fourth, the elimination of the unregulated intrastate market under the 1978 act allowed interstate purchasers to bid for gas that, without this change, may have been left unproduced for some time. While such reserves have not yet contributed much to gas flows, their prospective availability has altered expectations about future gas supplies, and made the industry and its regulators more willing to see new customers added.
• Finally, on the horizon are additional but more costly supplies of gas which lend assurance that consumers can be served—at a price—if some obstacles can be overcome. Liquefied natural gas projects are under way and can be expanded; additional gas is expected from Canada; the Alaska natural gas pipeline remains a possibility; synthetic natural gas from coal and exotic sources of gas are increasingly feasible; and above all, there is the prospect of large supplies of natural gas from Mexico.

These changes indicate that price is beginning to replace direct allocation as a means of bringing quantities demanded into equality with quantities supplied. Looking ahead, those consumers for whom gas has a special value see that they are likely to have all of it they are willing to pay for, while others for which it is less important are recognizing that they must switch to alternatives or do without.

The early workings of this process can be seen in the data. In 1973 gas consumption reached 22.0 trillion cubic feet (tcf), down fractionally from its all-time high in 1972. Electric utilities used 16.3 percent of that amount (down from 18.4 percent in 1970), industry 39.7 percent, and residential and commercial users 33.9 percent. By 1977 total consumption had Wien by 2.5 tcf, but residential and commercial use stayed almost even in volume terms. As a percentage of total consumption, residential and commercial use reached 37.5 percent of the total, while industrial use fell to 34.9 percent, down almost 2 tcf or 22 percent. Utility use was down 0.4 tcf. These shifts continued during 1978, paced by an increase in the number of residential and commercial consumers as moratoriums on hookups were relaxed.

The transition of the gas market from shortage toward balance is as encouraging as it is striking. It demonstrates that when adjustments are not constrained too tightly by price restraints and other controls, change can occur in energy markets. The record shows that the margins for adjustment are more numerous and more extensive than many had feared.

Even though brief periods of supply stringency may occur during severe winters, a process is now in place whereby long-term rationing of supplies, as in the early 1970s, is unlikely to reappear.

Two dangers remain. The process of gas deregulation may yet be stymied because of concerns about its effects on income distribution or on the price level. Alternatively, oil prices could rise so rapidly that they will outpace the rate of allowed gas price increases, which would have the effect of making price controls more binding. Either event would increase the likelihood of another shortage similar to that of the early 1970s.