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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

world, however, individuals and organizations constantly have to make tradeoffs. .

2. What were the major assumptions of the NPC study? These include that the growth in natural gas demand will outpace new natural gas supplies from traditional sources; a fundamental shift in the demand-supply relationship in the natural gas market; and an indefinite tight natural gas market in the absence of major policy initiatives. .

3. Did the study include a valid cost-benefit analysis? Such analysis should account for both economic costs (for example, the cost of switching from natural gas to alternative fuels) and non-economic costs (for example, the social costs of disrupting pristine wilderness areas) of developing new natural gas supplies and promoting energy efficiency. Policy-makers have to ask themselves why the United States has not developed more of its natural gas resources and undertaken additional energy conservation, and whether this has served some legitimate public purpose-improved environmental quality or higher economic efficiency from not subsidizing uneconomical energy efficiency-rather than some narrow private interests. .

4. What major problems did the NPC study address? Does the United States have a natural gas crisis or does it simply have a serious temporary problem where the market is responding appropriately to the prevailing tight gas-supply situation? Do the volatile prices encountered since 2000 portend a long-term problem? Policy-makers need to distinguish long-term from short-term problems. What are the long-term market fundamentals? What can be done in the short term to mitigate price volatility? As an historical reminder, just a few years ago natural gas was touted as the energy source of choice for its economic, environmental, and energy-efficiency features. In 2000, the American Gas Association (AGA) in its Fueling the Future study said, "Changes in U.S. energy policy that favored increased use of natural gas could improve air quality, conserve energy, and reduce reliance on imported oil from politically unstable countries." Over the past few years, the objective of a natural gas policy has distinctly shifted from increasing the use of natural gas to moderating price and price volatility. .

5. Why does the U.S. need to act now? What is the cost of delay versus the benefit of waiting to take action when policy-makers would have better information about future developments in the energy sector? Normally, movements in the relative price of a commodity, with the possible exception of oil, have not been a serious enough concern for the country to warrant a national policy initiative. This, however, should not obviate policy actions that would, say, remove market barriers blocking potential efficiency gains. .

6. What can go wrong, and what would the net social cost be if the United States does not act now? One conceivable outcome would be higher and more volatile natural gas prices over the next 20 years and, at the extreme, supply shortages if prices are not allowed to balance demand and supply in the natural gas market. .

7. What can go wrong if the United States pursues the policies and other initiatives recommended by the NPC study? One possibility is wasted government subsidies