Gas producers and utilities have all but abandoned R&D and marketing. Is it too late to reverse the death spiral, or can the industry learn from other check-off marketing successes?
Gas Storage: What Moves the Market & What Doesn't
to remain at the higher levels or continue to rise. Because they were risk-averse, they tended to hold onto more of their stored gas. They feared that using their stored gas immediately could expose them to even higher prices later. This apparent conclusion in one sense runs counter to the popular notion expressed lately that storage use has become a lot more flexible since Order 636. Yet while operational flexibility has increased, it may not be motivated by price, or at least not by price as we have represented it.
This theory led to another possible interpretation. It is possible that much of the stored gas in the Consuming East region was owned by local distribution companies, who, because of current regulatory structure, had little incentive to, or could not, predictably respond to price signals.
Figure 6 is a plot of the residuals from our regression analysis, that simply represents the variation in withdrawal differences not explained by our regression equation. We hoped that they would scatter around the zero line like a random error term for each week. But the figure showed that the residuals tended to increase as we progressed through the heating season, indicating the increased uncertainty associated storage withdrawals as the end of the heating season approaches.fn3 Also, the same week in different years gave us the highest and the lowest residuals.
The largest residual value (the observed value was greater than the expected value) occurred in the week ending Feb. 9, 1996, when prices in Transco Zone 6 were more than $10 per million Btu. Thus, although high prices on average lead to conservative behavior, exceptionally high prices may encourage the release of gas to the market. The low withdrawals for the week ending Feb. 7, 1997 were difficult to understand since, although prices were not particularly high or low, the storage level relative to expected demand statistic was 46 percent higher on Feb. 7, 1997 than on Feb. 9, 1996. This observation points again to the uncertainty surrounding individual withdrawal estimates.
On average, there is a strong relationship between withdrawals and temperature, but the relationship breaks down at times. It could be that storage operators make major adjustment decisions based on a variety of factors at the beginning of February, given that by then the coldest times of the year, on average, have passed. F
John H. Herbert is a senior economist at the Energy Information Administration and an adjunct professor of statistics at the Virginia Tech Telestar Graduate Center. James M. Thompson is an industry analyst and economist at EIA. Chris Ellsworth works for ESAI Inc., a consultancy. The views expressed are those of the authors and do not necessarily represent those of the EIA, U.S. DOE or ESAI Inc. The authors thank Mike Tita for his comments and discussions.
1Weekly average temperatures are computed by adding seven daily average temperatures and dividing by seven. Daily average temperature is derived by adding daily highs and lows for all four cities and dividing by eight.
2Transco Zone 65 runs along the Transco pipeline in northeastern Louisiana,