Allegations but no evidence of natural gas crisis
Originally published in the Houston Chronicle (1/11/04)
Forty years ago, as young faculty at the Massachusetts Institute of Technology, we began to analyze natural gas markets. The experience has been most rewarding, because it has exposed us to every type of government crisis management. After severe gas shortages in the mid-1970s, caused by federal wellhead price controls, partial deregulation produced an equally severe surplus, the gas bubble of the mid-1980s. Further partial deregulation, now 10 years in process, has depressed investment in storage and pipeline systems for delivery of gas. Crisis management has resulted in an industry that delivers no more gas now than it did 30 years ago.
The question now is whether we are about to go into another crisis period, given the media hue and cry about frequent sharp price increases in spot gas markets. In early May, the industry newsletter Energy Pulse carried the headline, "Days of shock and awe about to hit the natural gas and power markets." It stated that there was a lack of adequate supplies to meet minimum storage targets to protect public safety and reduce the risk of runaway gas prices in the coming winter.
In June, Chairman Alan Greenspan of the Federal Reserve System warned that gas prices would increase; since then, there have been at least 17 articles in the media predicting a winter squeeze, given low levels of gas in storage.
Now that winter is here, these predictions on storage are already wrong. Even so, current day-to-day price increases are said to require federal intervention. The economy of industrial Louisiana would be crippled by high gas prices, according to Rep. Billy Tauzin, R-La., calling for price controls. Almost every media source calls for construction of large-scale liquefied gas plants, to facilitate the importation of liquefied gas shipped in from the Middle East.
What is the case for current crisis management? The inventory of gas in underground storage, with access to delivery points, is now slightly above last year. Of course, the rest of the winter could be deeply cold, a repeat of 2000-2001.
We are not predicting that prices will not increase if it snows in Houston every day in February. But the case for a crisis, from media and government experts, follows from faulty storage estimates, blown out of crisis proportion to justify a fix in the industry right now.
Even so, gas supply in the next few years is going to be tight, given stagnation of investment in transmission and storage under pipeline regulations. Only recently have producers, large industrial users and retail distributors begun to add storage outside the regulatory process.
Long-term demands for gas in power production have increased. With tighter supply infrastructure and increased demands, the level of wellhead prices has risen in the past two years. The price rise is a signal that marginal industries must use less and that it pays to develop new reserves, as well as extensions of old reserves (since 1999 reserve additions have exceeded production into the pipelines by 20 percent).
Political schemes to synchronize reserve additions, production and final distribution are a dime a dozen. They make conditions worse, price levels higher and deliveries smaller. In the next few years, if you want the country to avoid gas price squeezes, you should take the position invented by our admired late colleague at MIT, professor Charles Kindleberger, who would restate the political axiom: Don't just stand there, do something. He would tell us, don't do something, just stand there. Gas markets do better if left alone. While not always successful, we should recall the massive convulsions of shortages in the 1970s and of unwanted gas in the 1980s, when markets were not allowed to work at all.
Adelman is a professor emeritus at the Massachusetts Institute of Technology. MacAvoy, author of The Natural Gas Market, is Williams Brothers Professor at the Yale School of Management.