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High Gas Prices: The Edge Comes Off

High Gas Prices:
Fortnightly Magazine - November 2004

least in the $3 to $4/MMBtu range, incentives for companies to continue to pursue LNG investments will remain.

Other Factors That Influence Supply Growth and Price

Business negotiating skills are important for increasing supplies and reducing price. The last five years has seen growth in the number and value of limited-liability companies, including limited partnerships within the natural gas industry. These companies have tax advantages over the standard corporations that still dominate the production side of the business. Thus, they have a greater incentive to invest. Since they generally must distribute all their profits to unit holders, they are not in position to hold on to their cash. The almost instinctive industry response of not over-investing, borne out of the industry upheaval in the 1980s, would be an unnatural instinct for a limited partnership. These companies must continually be aggressive about investing if they are to grow and not lose value.

The performance of limited-liability companies has been outstanding relative to other businesses over the last five years. There is reason to believe that these flexible businesses will not only grow in number but also grow individually and thus improve the productive capability of the industry.

A recent study found that although production by major producers and major independents (none of which were limited partnerships) had declined and flattened, respectively, "smaller players have been able, on average, to increase their production levels the required 2 percent." 9 These "smaller players" include the limited liability companies.

Some of the elevation in natural-gas price over the last several years is probably a consequence of many utilities entering into large fixed-price, long-term contracts. In fact, this was the strategy supported by the American Gas Association in 2003. 10

Fortunately, important state regulatory commissions continue to actively support competitive markets. 11 This should promote flexibility and could lead to reductions in cost of natural gas once companies are better able to negotiate with producers and intermediaries for better terms.

Endnotes

  1. , Sept. 12, 2002 (Ore. PUC).
  2. Joint Statement of the American Gas Association and the National Resources Defense Council Submitted to the National Association of Regulatory Commissioners, July 2004.
  3. Energy Information Administration, "Short-Term Energy Outlook - September 2004," Table A6. . For earlier history, see John H. Herbert, , New York, Praeger, 1992.
  4. The example is illustrative but representative. The income distribution statistics upon which the calculations are based are from the United States. Census Bureau, 2003, Table 683. The also reports that consumer expenditures were more than 70 percent of gross national product in 2002. The income statistics for Table 683 are based on results for 2001, but income has not changed much for the majority of households since then. Natural gas can cost $10 per 1,000 cubic feet for many households in December and January (the EIA in September 2004 forecast the price to be $10.44 in the 4th quarter of 2004). It can be estimated from EIA data that the average household in major gas-consuming states can use about 650 cubic feet per day during height of heating season, about 10 times as