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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

on white-elephant projects, or what turns out to be uneconomical sources of natural gas supply; other costs include major damage to pristine wilderness areas, regulatory distortions resulting from a wrong diagnosis of the problem being addressed, and excessive monies spent on promoting energy efficiency. We have learned from the past that things can turn out worse rather than better-the Howard Hughes syndrome may apply here where in trying to reduce or eliminate risk, or to lower costs, new and unexpected and unsuspected results can arise that would cause greater risks and costs than those avoided (e.g., demand-side management activities causing older, dirty plants to operate more with the result of higher levels of pollution; the market penetration of high-cost natural gas protected by a price floor lying above the prevailing market price). .

8. What, more than anything, should be taken away from the NPC study? One thing that can be reasonably taken from the NPC study is that the ball is in the court of those who support the status quo, rather than on those who advocate major initiatives, because the estimated potential benefits are gigantic. An objective analyst should inquire as to the social costs of increasing natural-gas supplies. .

9. What micro questions should be asked? (a) Has the NPC study overstated the severity of the current natural-gas price problem? Does it reflect a "Chicken Little" mentality by overstating the urgency to expand natural gas supplies from new sources and suggesting a serious price crisis looms? (b) What factors are most important in determining future natural gas prices? These include oil prices, drilling finds and productivity, economic growth, and the evolution of U.S. energy policy over the next 20 to 25 years; (c) What results of the study seem counterintuitive? (d) Since the relationship between model outcomes and policy choices can be tenuous, to what extent did the study rely on the modeling results relative to other sources of information in reaching its findings and recommendations? As a general principle, forecasts from models should not be the sole source of information used to recommend public policies; (e) How were the supply curves for domestic natural gas derived? Specifically, how did the study treat the information about prices, costs, and how do new discoveries convert into reserves over future time periods? (f) What did the study estimate as the demand response to higher natural gas prices? This is an especially critical issue, at least for economists, who have a strong belief, validated by economic theory and empirical evidence across a wide spectrum of goods and services, that price movements depend consequentially upon how consumers respond to changing prices; (g) How were the policy scenarios selected? One scenario ("Balanced Future") is probably excessively optimistic, while the other scenario ("Reactive Path") does not represent the worst-case but pretty much business-as-usual, except for additions to traditional and non-traditional gas supplies (for example, expansion of LNG facilities, construction of Arctic pipelines, and a vigorous response in lower-48 production from accessible areas); (h) Did the study measure the effect of higher natural gas prices on