[BETA] Fortnightly

The conclusions made by the NPC gas study raise more questions than they answer.

In late September of 2003, the National Petroleum Council (NPC) issued a comprehensive study on the future of the U.S. natural gas industry.1
Balancing Natural Gas Policy-Fueling the Demands of a Growing Economy accentuates the pursuit of an aggressive national supply-expansion policy and increased responsiveness to changing market prices. The study estimates that gas costs will fall by some $1 trillion over the next 20 years (which averages out to $50 billion per year, or about 40 percent of the current total natural-gas expenditures in the United States) from a balanced future of increased energy efficiency, immediate development of new natural gas resources, and flexibility in fuel choice. The savings would be $300 billion from increased access to U.S. natural gas resources alone.

Major Costs

While on the surface the general findings of the study seem sensible, a serious debate should ensue over the costs of attaining the more balanced U.S. natural gas industry that the study advocates. One cost pertains to the environmental effects of expanding domestic natural gas supplies and liquefied natural gas. A second involves the cost of subsidies (for example, federal price support guarantees and tax credits) that may be required to increase supplies from particular new and existing sources. A third is the economic cost associated with advancing energy efficiency and fuel switching by industrial customers and electric generators.

Underpinning the conclusions and recommendations of the NPC study is the prediction that the United States is heading toward an untenable future as the energy sector places greater reliance on natural gas to satisfy U.S. energy demand, especially in the production of electricity, while concurrently restricting the drilling and production of substantial domestic natural gas resources. .

The urgent conclusion of the study is that the United States must decide now how to increase future natural gas supplies in addition to making the demand side of the natural gas market more responsive to prices. Any postponement would only harm consumers of both natural gas and electricity. .

A Little Perspective

No one can deny the inflation and volatility of natural gas prices over the last few years. Many analysts and industry observers, including the authors of the NPC study, attribute these recent events to the harbinger of a tight gas market that will carry forward to the years ahead unless the U.S. deviates from a status quo, do-nothing strategy. They see these developments in the natural gas market as not cyclical but structural, with long-lasting effects. .

How one interprets recent events has important implications for public policy. If recent natural-gas price inflation and volatility are truly a cyclical phenomenon, then there would be less justification for taking major initiatives to remedy what in reality would be a temporary market condition. On the other hand, the trend of a tight gas market aggravated by gas supplies not keeping pace with growing demand would call for a more proactive policy. The evidence seems to support the latter view, which is precisely in line with the