Two states have decided to review the high cost of gas this past winter and the effect the price hike has had on the states' gas utilities.
Florida. While granting requested rate...
expansion in the energy producing industries brings a need for new workers, 6 training programs, and a demand for higher wages that was foregone during the previous years of declining prices. These factors lead to a decrease in productivity, and contribute to higher costs and prices in the early years of the next price cycle.
Energy Consumers' Response to Long-Term Price Trends
As fuel prices are forced down to their cash cost of production near the bottom of the price cycle, the price differential between crude oil and natural gas (in a free unregulated market) and coal also bottoms. At this time, some electric power generators begin to consider using oil and natural gas instead of coal. These fuels also have a lower capital investment associated with their use in electric power generation. In the transportation sector, the popularity of sport utility vehicles in the late 1990s is comparable to that of the gas-guzzling motor homes during the early 1970s, prior to the last energy crisis.
The fuel consumers' response to rising energy prices is not immediate. It usually takes several years of rising prices for these consumers to realize that they are not experiencing a short-term aberration in the long-term downward trend in prices that has been ongoing for many years. It is often near the top of the energy price cycle when consumers finally react. For example, many utilities began their conversions back to coal in 1980, the year international oil prices peaked and one year before domestic crude oil prices peaked.
Impact of Regulatory Controls
The free movement of prices in any market adjusts supply and demand, allocates resources, and promotes substitution to maximize economic efficiencies. However, prices often have been subject to regulatory controls for long periods of time. For natural gas, regulation began in 1938 with the Natural Gas Act. In 1954, a Supreme Court decision 7 interpreted the Natural Gas Act as requiring the Federal Power Commission to regulate natural gas wellhead prices. These regulatory controls often were the cause of large price differentials between competing fuels, contributed to shortages, and led to price spikes in unregulated fuels.
During the energy crisis of the 1970s, price controls led to large price disparities. Natural gas from wells supplying unregulated intrastate markets had prices that could be several times that from a nearby controlled well supplying regulated interstate markets. As seen from Figure 1, the average wellhead price of natural gas was less than the f.o.b. mine price of coal until 1978. The price controls placed on domestic crude oil in 1971 produced a large price disparity between the much higher-priced imported crude oils (see price of landed crude oil in Figure 1) and the regulated lower-priced U.S. domestic crude oils. This restrained domestic natural gas and crude oil production, and ultimately led to much higher prices.
In 1978, Congress passed the Natural Gas Policy Act, which mandated the phased decontrol of natural gas wellhead prices. In the same year, the Fuel Use Act was passed, which required that all electric utilities discontinue using natural gas in generating