March 1973 1 - Year Averaged in the 1960'S
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This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library ([email protected]) Natural Gas- Higher Prices Might Help Slow the Growing Shortage - Just how critical the shortage in per thousand and maybe as much however, is in areas that would be na~ural gas has become was amply as $1 or more. And even with tech hard to explore and develop. About Pdi?Inted up this winter. Not only nological advances, it would take 14 percent is at depths of over d prices move sharply upward years to build the plant capacity 15,000 feet. About 20 percent is ~t suppliers were simply unable needed to provide an effective sup under waters offshore. And some n;eet the demand in many areas, plement to natural gas reserves. 28 percent is in Alaska. But even haVIng to cut off the flow to some The most direct solution to the so, the estimate is reassuring. users. Plants and schools had to problem in the long run, then-bar Some Government estimates are close, and hospitals and power ring adequate substitution-is an even more promising. One study plants had to shift to other fuels. increase in the rate of discovery of sets the nation's potential for in This Was true even in Texas new reserves. By all estimates, creasing its proved reserves at more source of more than a third ~f the there are still ample reserves to be than 2,000 trillion cubic feet. nation's natural gas. found in this country. Looking for further increases in t !f anything, with demand for One industry estimate has fixed exploration, the Federal Power his convenient, clean-burning fuel the nation's undiscovered gas at Commission foresees a reversal in Continuing to rise the shortage is 1,178 trillion cubic feet-50 times the downtrend that brought new apt to become mo~e acute. Con more gas than is now marketed. discoveries in 1970 to only two sUmption reached about 23 trillion Over 60 percent of this potential, thirds of the 17 trillion cubic feet a ~~bic feet in 1971, for example, and h I~f new discoveries totaling about 2;9 t~a~, proved reserves fell to 1 tnllion cubic feet-14 trillion Development of pipelines ess than four years before. sets off boom in use of gas ... Y Drilling picked up somewhat last ear. But it can take four or five TRILLION CUBIC FEET Years for new reserves to affect the 25---------------------------------------- market supply. By the time these newdi. sCoveries have been brought Into actual production, annual con sumth p t·Ion may be running more an 30 trillion cubic feet. Other SOurces of gas are obvi f~SlY required. For the near future, Ports probably offer the only ~1ans of obtaining gas in sufficient ? urnes. Imported gas is expen- m'SIVe ho wever. The huge mvest-. a ents and costs required to liquefy n d transport natural gas could rUSh consumer prices for imports f~e ~ore than $1 per thousand cubic Of about twice the average price fuas now produced domestically. b 1 Ventually, synthetic gas could c: ~anufactured from other hydro o I I I I I no~o o~s. But without a major tech 1930 1940 1950 1960 1970 not ~Ical breakthrough, gas could SOURCE: U.S. Bureau of Mines fu I e manufactured from other e s for sale at less than 70 cents nUs'llless Review I March 1973 1 - year averaged in the 1960's. The With construction of large inter ceived manufactured, mixed, or commission's projection shows dis state pipelines, the picture began liquid petroleum gas through util coveries returning to this average to change-and rapidly. When lines ity mains, by the midsixties fewer level by about 1980. laid during World War II to carry than one out of ten users was re The problem, of course, is oil from the Southwest to the ceiving anything but natural gas. whether even that rate would ever North and Northeast were C\!)l'l Even with this rapid expansion be adequate again. Demand for verted to gas after the war, a vast in the market for natural gas, how natural gas has been going up new market was already waiting. ever, there was still little need for sharply for 20 years. And with the Suppliers had only to capture an incentive to explore for more gas. increases in both energy needs and existing market from manufactured One reason was the vastness of the concern over pollution problems, gas. Distribution systems were al reserves built up in the search for the outlook is for demand to rise ready installed to deliver manufac oil at a time when there were still even faster. tured gas, and users were equipped few opportunities to market gas. In to burn gas. Before the advance of Matter of incentives 1946, for example-when demand this inexpensive wonder fuel, other for natural gas was already clearly Basic to the matter of increasing heating fuels rapidly retreated. on the rise-there were still enough reserves, however, is the problem of The lower price of natural gas and proved reserves to meet production providing incentives for bearing the the need to keep pipelines flowing needs for at least 39 years. high costs and enormous risks of at capacity even allowed suppliers Large reserves continued to hang exploring for gas. In a very real to shoulder their way int0 the over the market for several years. sense, there have never been many market for low-value boiler fuel. Even after reserves began nosing incentives to stimulate production By the midfifties, almost every downward, putting upward pres of natural gas-and certainly not major population center was con sure on prices, there was little con any long-term incentives. nected with oil fields in the South cern over the incentives to look for , Based originally on what was west. And where as late as the start new reserves. By the time the issue until very recent years a fairly low of the 1950's at least four out of of incentives was raised, the gas in- I value byproduct of the oil industry, ten of the nation's gas users re- dustry was caught in a cost-price natural gas did not emerge as a ma jor industry in its own right until pipelines were laid to connect some of the world's largest oil fields in . .. but reserves taper oft, the Southwest with large fuel mar dropping relative to production kets in the North and Northeast. Until transmission lines were TRILLION CUBIC FEET YEARS built, the enormous pools of gas 300 ------------------------------__________ 45 being discovered in the oil fields of Texas, Oklahoma, Louisiana, and later New Mexico were isolated from large markets. Early in the development of these fields, gas was 200 - often flared or vented to the atmo - 30 sphere simply to get rid of it. Always a highly desirable fuel if it could be made available, some gas was sold to local utilities. But - 20 because of its great abundance and 100 - the small markets served, prices were cheap, providing far more in centive for people in the Southwest ----------CRiTiCALLEVEL--------- - 10 to consume gas than to produce it. Large quantities went, for example, into such low-value uses as the manufacturing of carbon black. O-rl----'I-----rl----,lr---~I----~I o And residential and commercial 1946 1951 1956 1961 1966 1971 users in many local markets re SOURCE: American Gas Association ceived unmetered service. 2 - squeeze that made interest in ex serves in the continental United ket conditions totally unrelated to ploratory drilling hard to arouse. States are rapidly approaching that the demand for natural gas. level. From a total 14.6 times Other problems bearing on the Cost-price squeeze greater than production in 1968, re rate of withdrawal grow out of the Costs of drilling oil and gas wells in serves fell to 11.9 times production need to protect the rights of others 1971, for example, averaged 85 per in 1970. to a share in the discovery. Be cent higher than in 1956. But For more than two decades after cause a productive field is ordinar prices for natural gas were only 37 World War II, additions to reserves ily large enough to cross the land percent higher, and oil prices were usually exceeded the increases in of many owners, withdrawals must up only 17 percent. consumption. But although re be regulated to protect the interest ,The result was a significant de serves were rising, consumption of everyone with a property right clIne in drilling. By 1971, the num was growing fast enough to force a in the underground reservoir. ber of wells drilled had dropped to continuous decline in reserves rela Without regulation, a well on one less than half the number drilled in tive to the demands on them. And property might deplete the oil and 1956. And with all the pressure for since 1968, reserves have been ex gas under neighboring properties. th7 discovery of new reserves, only panding only about half as fast as And still other withdrawal prob a ~ttle more than half as many withdrawals, forcing reserve-to lems relate to holding back produc WIldcat wells were drilled in the production ratios in some areas be tion to keep wells from choking up search for new fields. low the 10-to-1Ievel. with sand. Often, when wells are , W~th exploration being pushed There are several reasons for as produced too fast, sand begins Into Increasingly difficult locations, signing crucial importance to a blocking off the flow, creating the ~osts are bound to increase still fur- 10-to-1 ratio.