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A Gas Crisis, or Not?

The conclusions made by the NPC gas study raise more questions than they answer.
Fortnightly Magazine - September 2004

findings of the NPC study. .

In recent years we have seen natural gas prices rise precipitously for short periods, followed by dramatic declines. So one fundamental policy distinction is whether the NPC is over-reacting to what has happened since 2000, or whether the United States does in fact face a serious longer-term problem that demands new and immediate governmental initiatives.2 .

The NPC report's four recommendations (see "NPC Study Recommendations," p. 50) derive from three developments that have emerged over the last few years. n First, a fundamental shift in the supply-demand balance has caused natural gas prices to be higher and more volatile. .

n Second, North America is moving to a new era in which it will no longer be self-reliant in meeting its growing natural gas needs, as production from traditional U.S. and Canadian basins flattens. .

n Third, government policy encourages the use of natural gas but does not adequately address the corresponding need for additional supplies. This policy, both explicit and implicit in nature, was premised on the low natural gas prices of the 1990s. If policy-makers-like most industry observers-believe that the period of cheap natural gas prices ($2/MMBtu to $3/MMBtu for natural gas sold in the spot market) is behind us, the U.S. government should reconsider whether increasing dependence on natural gas to meet the nation's energy needs reflects good policy. .

If prices do remain high and volatile, the natural gas market should be expected to look at other sources of energy and a more efficient use of energy to displace natural gas. But this may take time, with probably little positive effect over the next few years. In short, a properly functioning market, such as the natural gas sector, left on its own would be expected to ultimately lower the consumption of natural gas as prices rise and become more volatile. .

Should the United States do things differently in the natural gas sector? Maybe, but before it does, analysts should lay the facts out on the table as best they can. The NPC study seems to offer this, but the study is not compelling in calling for an aggressive policy to expand natural gas supplies. .

Nine Questions for the NPC

1. What lessons can be drawn from past U.S. energy policies that have tried to increase domestic energy supplies, especially oil? Energy policies and the underlying analyses tend to overstate the problem and understate the cost of implementation. They also tend to be inflexible. This is especially true when targets (e.g., price floors) are set, generally producing bad results because markets are too dynamic and unpredictable to know today what the optimal target should be for tomorrow. In addition, energy policies are frequently not followed through. Finally, energy policies are often overtaken by new developments. Many if not most energy policies seem on the surface to be morally, economically, socially, and politically correct; it takes real work to flush out the full story. Energy policies often communicate the fantasy that we can have everything without paying a price. In the real