Is the predicted crisis this winter a failure of policy, the market, or both?

Is the predicted crisis this winter a failure of policy, the market, or both?

Fortnightly Magazine - November 2005
EES North America

The energy industry has known for quite some time now that domestic production of natural gas this century never would keep up with demand. Why else would Congress have made such great efforts in the Energy Policy Act of 2005 (EPACT) to promote more domestic drilling and infrastructure development-including construction of LNG terminals?

Alas, we may need to wait several years before EPACT makes a dent in this gloomy supply picture. Meanwhile, we'll likely have to endure a few more press releases and communiqués—some coming even from the White House—suggesting that the experts only now have awakened to the specter of price spikes and shortages.

For example, with respect to natural gas and gasoline, President Bush has urged conservation of energy resources on several occasions in the last two months—a complete policy reversal that has been equated to President Jimmy Carter's "cardigan sweater" approach to energy crises.

Furthermore, several state public utility commissions (PUCs) have issued warnings of a doubling of natural-gas bills in parts of the Northeast and other places. Electric bills also are predicted to increase by one third as a result of reliance on gas-fired power in certain regions.

On Oct. 7, the price of natural gas for November delivery closed at $13.38/MMBTU on the New York Mercantile Exchange. That was up 90 percent from the year before.

Certainly, state leaders are weighing the impacts. In a Rotary Club speech in early October, Florida Gov. Jeb Bush, noting the state's vulnerability to property insurance and energy, said, "We have to recognize that we have to conserve a lot more than we have been. … And it means recognizing that all the new capacity in a fast-growing state can't be natural gas." Of course, much blame for the upcoming winter crisis is being placed on Hurricanes Katrina and Rita-as some 20 percent of the U.S. gas supply comes from the offshore gulf.

Policymakers, regulators, and utility executives are doing whatever they can to contain the effects of the crisis. Yet many wonder why it could not have been averted, given long-understood fundamentals of domestic gas markets. Gulf hurricanes have been seen before, with their attendant effects of production and delivery. In fact, natural-gas prices in the Northeast have spiked during 2003, 2004, and 2005, according to several industry reports.

Given the free market in natural gas, why haven't prices attracted the needed infrastructure or supply? (LNG imports are actually down from last year.) What policies could have been contemplated ahead of national legislation? Or put more simply, why has supply lagged demand?

Infrastructure Problems

According to a report from the staff of the Federal Energy Regulatory Commission (FERC) published on Oct. 12 (the same day as the commission's own conference on the state of natural gas infrastructure), "The pump was primed for significant energy price effects well before Hurricane Katrina and Rita hit the Gulf Coast production areas."

The commission adds: "The Gulf storms exacerbated already tight