Natural Gas Regulation: Throwing Out Supply and Demand

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The front page of the September 2 Washington Post carried a strange headline: "Natural Gas Surplus Leads to 20Pct. Price Rise." The article stated that "Washington-areaconsumers will be paying 20 to 25 percent more for naturalgas over the next six months" because Columbia Gas System, alarge pipeline supplier to the area, "has a huge surplus ofexpensive 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 gasis apparently being shut in or possibly even vented into theair 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 resultin lower prices?

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

Nolan Ezra Clark

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