Cato Policy Analysis No. 20 December 1, 1982

Policy Analysis

Natural Gas Regulation:
Throwing Out Supply and Demand

by Nolan Ezra Clark

Nolan Ezra Clark is a Washington attorney currently writing a book on natural gas regulation.


Executive Summary

The front page of the September 2 Washington Post carried a strange headline: "Natural Gas Surplus Leads to 20 Pct. Price Rise." The article stated that "Washington-area consumers will be paying 20 to 25 percent more for natural gas over the next six months" because Columbia Gas System, a large pipeline supplier to the area, "has a huge surplus of expensive gas and has shut down 20,000 small wells in Appalachia that were selling fuel for one-third that price."[1]

What is going on? It seems absurd that inexpensive gas is apparently being shut in or possibly even vented into the air when more expensive gas is being transported by the pipelines. Further, what has happened to the age-old law of supply and demand, under which surpluses are supposed to result in lower prices?

The readers of the Post have been quick to assign blame. One reader attributes the increases in price to "big producers and suppliers" that are "greedy, corrupt and unscrupulous."[2] Another faults the "regulatory agency (the Federal Energy Regulatory Commission) that allows Columbia Gas System to close thousands of wells producing gas at one-third the price they are paying and passing the cost on to the consumer."[3] The chairman of Columbia Gas says that higher rates "are not the result of wells being shut in the Appalachian Basin in favor of more expensive gas elsewhere," nor "the result of the current short-term supply surplus," but rather "the direct result of higher wellhead prices provided for us by the Natural Gas Policy Act of 1978 (NGPA)."[4] The president of the Natural Gas Supply Association blames the venting of cheap gas and the shipment of expensive gas on the "NGPA, which sets the prices of natural gas and encourages the most expensive gas to be brought to market first."[5] A vice president of the American Petroleum Institute states: "The phenomena described in the Post article are exactly the sort caused by federal intervention and would not occur were such intervention removed."[6]

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