Progressive Policy Institute
Support efforts to tap “unconventional” gasreserves in the Rocky Mountains in anenvironmentally sound manner;
Increase funding for environmental reviews,land management planning, and inspectionand enforcement of production facilities onfederal lands;
Support research and development forimproved extraction techniques and fortechnologies to get stranded gas to market;
Set a national renewable portfolio standard(RPS) for electric utilities to lessendependence on all fossil fuels, includingnatural gas; and
Support the development of liquefied naturalgas (LNG) in the Western Hemisphere.
The Fallout From Recent Price Shocks
Spot prices for natural gas soared brieflyin February, increasing more than 500 percentto $18 per thousand cubic feet (Mcf) andfocusing attention on the market’s volatility.Prices have since settled back into a $5 to $6trading range. Still, that is a long way fromthe stable $2 to $2.25 per Mcf prices that largelyprevailed for more than a decade.This price volatility threatens scenarioscalling for relatively cheap natural gas to firemore power plants, heat more homes and businesses, fuel more clean cars, trucks and buses, and even make the much-vauntedhydrogen future possible. It is also wreakinghavoc with industries such as petrochemicalsand fertilizers that use gas as a feedstock.The Energy Information Administration(EIA) projects total demand for natural gaswill increase at an average annual rate of 1.8percent through 2025, from 22.7 trillioncubic feet to 34.9 trillion cubic feet.
The chiefreason is that electric generators are buildinggas-fired plants to meet peak load demands.This is good news for efforts to improvepublic health and slow global warming.Compared to coal-fired plants—thepredominant source of electricity—on akilowatt-hour basis of output, natural gas-firedplants emit virtually no mercury, 99 percentless sulfur dioxide, 80 percent less nitrogenoxide, and 50 percent less CO2, the chiefgreenhouse gas. Little wonder that EIAestimates natural gas will fire 80 percent ofthe new generating plants to come online between now and 2025.
But, as recent hot summers and cold wintershave demonstrated, the inelastic demand fornatural gas—exacerbated by what is largely a just-in-time delivery system, especially whennatural gas storage levels are low—means thatminor bumps in demand can lead todisproportionately large price spikes.In the short term, there is little governmentpolicy can do. As a General Accounting Office(GAO) analysis of the price gyrations of 2001put it: “Natural gas supply is relatively fixedin the short-term; it is limited to availablestorage and production and cannot be quicklyincreased to meet increased demand.”
And in the next few years prices couldremain high. The increased use of natural gasto meet summer’s peak electricity needs hasupset the traditional pattern for managingstorage. Typically, gas suppliers refilledstorage in summer, when demand and pricesonce were low, to meet heating needs for thefollowing winter.This is why it is all the more alarming thatproduction is falling. Despite higher prices,U.S. production fell 5 percent last year from2001 levels and 2003 production is expectedto lag behind 2002.
Higher prices haveprompted greater exploration, as the numberof drilled wells increases, but companies arenot making up for the depletion of existingwells and fields. Moreover, independent gasproducers are now responsible for asignificant majority of exploration activityhere at home, while the major companies arelargely investing abroad where they see better returns on their investment. They are betting on meeting America’s gas needs withcheap gas produced abroad, liquefied, andshipped to America via tankers.