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25626 EXTENSIONS OF REMARKS October 27, 1981 EXTENSION OF REMARKS HOW FAST WILL GAS PRICES ing climate which has been ignored by many In another politically self-serving judg RISE UNDER DECONTROL? studies of this issue. Price increases will ment, Energy Action assumes a jump in take place, but rising prices for natural gas price from $1.80 mcf to $7 .00 per mcf with are likely to have the same impact on gas decontrol, but no increased conservation as HON. WILLIAM E. DANNEMEYER markets that higher oil prices have had on the price rises. Energy Action may believe OF CALIFORNIA oil markets. Higher prices will engender that the use of higher prices to induce con IN THE HOUSE OF REPRESENTATIVES conservation, which will force distributors servation is wrong in principle, but it should to drive hard bargains with producers. not ignore that this approach works. Final Tuesday, October 27, 1981 And: ly, there is no recognition by opponents of e Mr. DANNEMEYER. Mr. Speaker, Although gas prices will certainly rise decontrol like Energy Action and AGA that the decontrol of natural gas prices with decontrol and even under present law, what is working now in the market for oil through the repeal or reform of the there is good reason to believe that they will will work for gas too, and probably better Natural Gas Policy Act of 1978 rise fail'ly gradually, and in a way which will because there is no organization like OPEC CNGPA) continues to be the most im encourage reduced oil imports and a meas to put a floor under gas prices when con ured acceleration of conservation and alter sumer resistance starts to make them erode. portant energy issue facing the 97th native energy investments. Another reason for the oversimplified as Congress. It is, in fact, extremely re sumption that gas prices will immediately grettable that progress to date has Mr. Speaker, Mr. London's article brings home once more the need for jump to the level of oil is the inability of ex been marginal either in Congress or isting energy models to factor in all the bar within the policy circles of the admin immediate, total decontrol of natural gaining variables. They can not easily cap istration. Natural gas decontrol will gas prices as provided for by my bill, ture the intricate bargaining relationships bring order to domestic markets H.R. 2019, the Natural Gas Decontrol in energy markets, which have come into through increased incentives for pro Act of 1981. I insert the full text of play with oil recently, and which will also duction and conservation. the article at this point in the RECORD: come into play for gas once it is deregulat According to Prof. Glenn Loury of How FAST WILL GAs PRICES RISE UNDER ed. These modeling problems, however, the University of Michigan, decontrol DECONTROL? should not cause us to overlook the change <By Paul A. London) in bargaining positions which will occur would back out an eventual 2.83 mil with decontrol, and its impact on prices. lion barrels of imported oil per day, Most studies of the impact of natural gas price decontrol assume that the price of gas There is a good chance that price increases reduce the price of a barrel of crude will rise to an oil equivalent within the first after full decontrol will be significantly oil by $10 below what it would other year. Several assume this equivalent price to slower than most people now assume. wise be absent natural gas decontrol, be that of high sulfur residual oil. Others Market forces will ensure that even immedi and produce an eventual increase in use very high projections of future oil prices ate decontrol will lead only to a gradual in supply of 5.89 trillion cubic feet and assume gas will "fly up" to these levels crease in gas prices over several years until CTCF), which would amount to a 25 with decontrol. A few mention a lower gas a stable oil-gas-coal-alternatives price rela percent increase over current levels. price linked to coal in industrial markets. In tionship is achieved. This prediction of a a competitive energy market with interfuel slow trajectory of gas price increases in One of the key questions that has competition, natural gas, which is now often based on a realistic view of the bargaining been raised about decontrol is the 50 per cent less expensive than oil, in the capacities of various actors once decontrol extent to which it would increase well- long run will rise to a price closely related to takes place. 1\ead prices for natural gas and, in that of other fuels. But the assumption that WHO ARE THE ACTORS? turn, to what extent these price in this substantial price rise will occur immedi creases at the wellhead would affect ately after decontrol and cause severe ad Prices after decontrol will be set by the consumer gas bills. There is no doubt justment problems, is questionable and un interaction of a number of actors faced by realistic. supply and demand constraints. The price that natural gas prices would increase. In part, the assumption that gas prices of gas will not simply be dictated by the However, the magnitude of the price will rise immediately to an oil equivalent price of oil. Bargaining will take place. Gas increase remains a subject of consider after decontrol is simply blind opposition to prices will rise but the actors in a price bar able disagreement. The most outspo decontrol Energy Action, which claims to gaining situation will play much different ken opponents of decontrol have ven represent consumers, for example, assumes cards than are being played now. Various tured forward with the prediction that gas at the wellhead will rise to the price of starting positions for the bargaining are prices would double in a very short oil at the burner tip, ignoring transporta clear. period of time. Such claims cannot be tion costs. This allows Energy Action to add Gas producers will seek to move prices up about $2 per thousand cubic feet <mcf) to as high as possible and to produce as much taken lightly. the costs of decontrol, which no doubt as possible. In its issue of August 8, 1981, the Na serves its purposes. Similarly, the American Various classes of present gas consumers, tional Journal carried an excellent ar Gas Association <AGA), a group composed residential, commercial, industrial, and utili ticle in its policy forum section by principally of gas distribution and pipeline ty, will react to higher gas prices by conserv Paul A. London, a Washington-based companies, bases its assumptions of a fly-up ing and making alternative investments. economist who is working for the de in gas prices on the existence of some gas These same classes of oil consumers will control of natural gas on behalf of oil contracts calling for heating oil <#2 oil> have to decide whether to buy gas or stay equivalence and/or Most-Favored Nation with oil. marketers in the Northeast region of <MFN> treatment <a price equivalent to the the country. Mr. London examines in highest price in the gas field) after deregu Various gas distributors and pipelines will considerable detail how the major lation. AGA is legitimately worried about be willing to pay different prices for gas actors in the natural gas marketplace the contract problem and, perhaps to in supplies depending on the demands of their are actually likely to behave in a crease pressure for a solution, chooses in its customers, their load mix, their competitive analysis to ignore the likelihood that de ness with other fuels, and their customers' deregulated environment. He sets out ability to conserve in the face of higher the market forces that will keep price regulation would encourage and possibly re quire renegotiation of such contracts. AGA prices, transportation costs, etc. increases below those projected by also fails to point out that many old gas Public utility regulatory bodies will try to many decontrol opponents. He con contracts at 40 cents per mcf would be a protect consumers by reviewing contracts to cludes that: strong "bargaining chip" in the hands of purchase gas. The conservation and production impacts pipelines and distributors to encourage re Sellers of alternative fuels will have to of gas price increases resulting from gas negotiation of high-priced contracts after adjust their prices to keep market shares price decontrol will create a price bargain- decontrol. and to compete with decontrolled gas. e This "bullet" symbol identifies statements or insertions which are not spoken by the Member on the floor. October 27, 1981 EXTENSIONS OF REMARKS 25627 HOW WILL THE ACTORS BEHAVE WHEN GAS IS WHAT ABOUT INDUSTRIAL AND OTHER NON sistance and conservation will force distribu DECONTROLLED? RESIDENTIAL CUSTOMERS? tors and pipelines to make offers to produc Producer Behavior: First, it is safe to Current industrial use of oil is about 8.1 ers which will allow the marketers to sell assume that in a decontrolled market gas quads/year or 4 million barrels a day. About the gas~ and producers will have to accept producers (freed of existing contract and half of this is for heat and half for raw ma these offers. This means a natural gas price regulatory restraints) will try to get the terial. This is enough potential demand for above the current price but not a price so gas to absorb increased supplies from any high as to create an unmanageable conser highest possible prices. The question is vation bulge of unmarketable gas.