California’s new feed-in tariff (FIT) is creating a burgeoning market for green energy investments, but the policy has sparked a fierce battle over state authority to dictate wholesale power...
The Case Against Gas Dependence
prices to electricity generators are projected to reach $4.40/mcf by 2015 (2001 dollars)-equivalent to more than $6.00/mcf in nominal dollars.
The Economy and Demand Destruction
The energy crises of the 1970s demonstrated the harmful impact on jobs and the economy that natural gas shortages can have. The U.S. economy suffered through recessions, widespread unemployment, inflation, and record-high interest rates. In the winter of 1975-76, unemployment resulting from gas curtailments in hard-hit regions ran as high as 100,000 for periods lasting from 20 to 90 days. 14 These effects were especially serious for the poor and for the nation's minorities. 15 More recently, the winter of 2002-2003 brought higher natural gas bills to many consumers, and low-income families were especially hard hit.
As Paul Cicio, director of the Industrial Energy Consumers Association, notes: "The economic welfare of our economy, the competitiveness of our industries, the affordability of natural gas for all consumers are at risk. We cannot afford another natural gas crisis. Every U.S. energy crisis in the last 30 years has been followed by an economic recession, and the 2000-2001 price spike was no exception. The energy crisis devastated industrial consumers. When natural gas prices reached $4/MMBtu, manufacturing began to reduce production and shift production to locations outside the U.S. At even higher prices, they shut down production, laying off employees, and damaging communities. We have arrived at this price threshold." 16
Moreover, two articles last year in Public Utilities Fortnightly that addressed natural gas supply, demand, and price issues seemed to confuse the solution with the problem. Robert Linden noted that high gas prices would lead to "demand destruction" in the industrial sector, which would, in part, counterbalance increasing power sector demand. 17 He further stated, "This price-induced demand destruction can be added to the other causes of reduced gas demand, including the closure of industrial facilities using natural gas as a feedstock." 18 Similarly, John Herbert, after noting that high natural gas prices have forced U.S. fertilizer plants to shut down, stated, "As fertilizer and other chemical plants continue to shut down, this will reduce demand for natural gas and increase overall supplies." 19
Both authors are correct in pointing out that high natural gas prices will tend to reduce industrial natural gas demand as industrial plants shut down, and that this will temper future natural gas price increases. However, the "destruction" of the nation's industrial sector is an extremely serious problem for the United States; it is not a "solution" to the natural-gas pricing problem. We should be very concerned with the strongly negative impact high natural gas prices are having on the U.S. industrial sector and the potential implications of this for the U.S. economy.
Despite all of the hype in recent years about the new economy, the information economy, the service economy, etc., manufacturing is, by far, the most critical sector of the U.S. economy, and it creates the broad foundation upon which the rest of the economy grows. 20 Manufacturing drives the rest of the economy, provides a disproportionate share of the nation's tax base, generates