The Natural Gas Chickens Come Home to Roost
The winter of 1976-77 has finally made obvious even to politicians the perverse consequences of price controls on natural gas. A spate of unusually mild winters had allowed the problem to be swept under the rug until now, despite a chorus of warnings from free-market economists and your editor (see "The Power Crisis," REASON, February 1971). No more. This winter has witnessed:
• Up to 1.5 million people thrown out of work to conserve scarce natural gas for heating homes and hospitals.
• Natural gas emergencies declared in eight states.
• A 32 percent increase in oil imports over last year, as utilities and factories convert from cheap, clean, unavailable gas to cartel-priced Arab oil. (Half of all oil consumed in this country now comes from overseas, thanks to government policies!)
How we got into this mess is obvious to anyone with a smattering of Economic literacy. For nearly 23 years interstate pipeline companies have been forbidden to pay producers the free-market price for natural gas. Over the past two years the interstate price ceilings have been raised somewhat, so that "new" gas in January sold for $1.44 per 1000 cu. ft. But since much of the gas being produced is from "old" wells, the average price was still only 70 cents—less than one-third the price of an equivalent number of BTUs of oil.
As a result, the amount of gas reserves committed to interstate pipelines has steadily declined, now amounting to only a few percent of onshore gas production. Most gas remains in the state where it is produced, where it can be sold at free-market prices—about $2.00 for 1000 cu. ft. Since natural gas heats half the nation's homes and provides 40 percent of industry's energy, it is no wonder that this winter's sudden increase in demand caused widespread hardship.
The emergency legislation passed by Congress at Jimmy Carter's request will provide some short-term relief. Through July 31 the interstate price ceilings have been lifted to $2.25, and intrastate pipelines have been granted permission to move gas from one interstate pipeline to another without coming under Federal regulation.
But this band-aid legislation does not solve the problem. Two decades of price controls have seriously reduced the amount of money invested in finding and proving new reserves of gas. Proved reserves peaked out a decade ago, and have been dropping nearly every year since then. And as low-cost fields have been exhausted, the cost of bringing in new fields has soared. Wells three miles deep are now becoming common in Texas and Oklahoma. And the odds of finding a "significant" new field continue to decline.
What all of this means, according to the MIT Energy Lab, is that even if we get substantial, permanent deregulation, it will be at least five years until supply and demand come into balance and the gas shortage is eliminated. The emergency deregulation just enacted, if kept in force for the full year, will yield only a five percent increase in supplies this year, due to the length of time it takes to get new fields into production. And if price controls are reinstated on Aug. 1, when the emergency legislation runs out, MIT projects a 40 percent shortage by 1980.
Critics of deregulation trot out all the old cliches about greedy capitalists sitting on huge reserves of gas, awaiting higher prices so they can reap windfall profits. Yet the facts are clearly otherwise. The limited price increases of the past few years have led to a doubling of exploratory drilling, But the amounts of new gas found each year have still declined (from 10 trillion cu. ft. found in 1971 to 9.2 trillion in 1975). Total proved reserves are estimated at 225 trillion cu. ft.—only 12 years' consumption at the current rate of use. Estimates of remaining undiscovered gas in conventional fields range from 350 to 4000 trillion cu. ft. But the problem is to induce companies to sink the needed capital into the increasingly costly search for this gas, rather than into more profitable investments.
In addition, there are other, as yet untapped, sources of gas. The National Research Council Forum on Potential Resources of Natural Gas, held in January 1976 (see Science, Vol. 191, Feb. 13, 1976, p. 549), identified four additional sources of natural gas which could be exploited economically if prices were at free-market levels. These are:
• Methane trapped in coal beds. Tapping this source before coal mining is begun would increase mine safety and reduce mine operating costs. Techniques to do so have already been proven. Potential reserves: 300 trillion cu. ft.
• Gas trapped in Devonian shale. Several techniques have been developed for extracting such gas, but the best of them would require a gas price of $2.00 per 1000 cu. ft. to be profitable. Potential reserves: 494 trillion cu. ft.
• Gas in tight sands, interspersed with shale. This gas can be obtained either by explosive or hydraulic fracturing, either one feasible at $2.00 per 1000 cu. ft. Potential reserves: 600 trillion cu. ft.
• Methane dissolved in water in the geopressurized zone of the Gulf Coast. Estimates of the amount of gas in this zone vary widely, but the U.S. Geological Survey figure of 48,000 trillion cu. ft. is representative. Only five percent of this may be recoverable—some 2400 trillion cu. ft.
Together these sources could provide an additional 3794 trillion cu. ft.—17 times more than existing proved reserves and equal to the highest estimates of remaining undiscovered gas from conventional sources. Clearly, the gas is there if pricing is returned to the free market.
But will it be? That is the key question. For 23 years the Congress has defied logic, common sense, and basic economics. During the past two years, as the crisis warning signs became unmistakable, key Congressional leaders blocked action on deregulation. Four, in particular, must take the lion's share of the blame. Senators Adlai Stevenson (D.-IL) and Henry Jackson (D.-WA), both self-styled energy experts, vociferously opposed the 1975 partial deregulation bill, which nonetheless passed the Senate. In the House it was promptly bottled up in committee by Rep. John Dingell (D.-MI), and there it died. Rep. John Moss (D.-CA) meanwhile held hearings attacking gas producers as monopolists.
Pompous demagogues such as these are directly responsible for putting 1.5 million people out of work this winter. They have callously reaped political mileage by attacking producers, posing all the while as friends of consumers. Now the consumers are out of gas, out of jobs, shivering in their homes, dependent on Arab oil—all thanks to energy "experts" the likes of Henry Jackson.
The solution to the natural gas crisis lies in total, complete, and immediate deregulation. But simple justice demands something more: the immediate recall of those responsible for this winter's suffering. Hooting Stevenson, Jackson, Dingell, and Moss out of Washington should be seen as a key element in solving this country's energy crisis.