Gas Pains

 The shortage of gas in the United States is now officially recognized.

 The shortage of gas in the United States is now officially recognized.  It has been legitimized by Alan Greenspan in testimony before the House Energy and Commerce Committee, reported by The New York Times and the Wall Street Journal, and advanced to an editorial subject in the Wall Street Journal; all in a fortnight.   

This is a problem that has been building for years, however, and will have deep and profound consequences for the American economy and, consequently, political alignments.  Because natural gas is clean-burning and economical, it is the primary fuel for heating new homes and commercial developments and new facilities to generate electricity.  Demand is increasing and production is declining.  Shortages are predicted to have severe negative consequences for the American economy.  At the same time, political and market forces have limited the supply of natural gas and severely constrained development of new supplies.  

A gas shortage developed in the early 1970s at about the same time as the Arab embargo on oil.  The two combined for what was called the Energy Crisis and caused major political reaction.  

In response to the gas shortage of the 1970s, government provided various price incentives in long-term contracts for pipelines and producers.  Large supplies were developed and eventually surplus capacity was available.  This surplus lowered prices for marginal customers who purchased gas on the spot market.  The price discrepancy led to the abrogation of the long-term contracts and repudiation of the price incentives.  Gas contracts started trading on the NYMEX.  Marginal pricing, in which the price of small marginal amounts determines the price of all the gas (or oil, or any commodity traded in such a manner), became the pricing system for gas and oil.   

Marginal pricing led the way down for prices for all gas to sub-economical levels at the same time oil prices also collapsed.  Producers bankrupted on a large scale and repudiated their debt.  In the late 1980's the industry imploded by about 80 percent; widespread layoffs collapsed real-estate markets from Texas through Oklahoma, Kansas, New Mexico, and Colorado to Wyoming and Montana.  Homes could be bought by assuming payments.  At one point, Denver had 17 "see-through" major office buildings downtown.  Banks failed and when the chain of debt repudiation extended to home mortgages, savings and loans followed.  Commercial real estate and home equities were destroyed.  

But the rest of the country neither noticed nor cared.  With cheap gas and oil, the national economy continued to grow.  Real estate values surged on both coasts; the increase of employment in manufacturing was followed by the tech boom of the late 1990s.   

Concurrently, the growth of the environmental movement in the 1970s began raising questions about pollution and the effect of any type of industrial activity, including oil and gas development, on the environment.  The effect of ever-increasing environmental restrictions on oil and gas operations through the 1990s was not noticed; a surplus of supply was available and more development was not needed.    

That supply surplus is now gone, however, and the outlook is not good.  Prices are still determined by trading contracts on the NYMEX and other short-term trading mechanisms.  Marginal pricing is now increasing the price of all gas just as it decreased it in the 1980s.  Severe environmental and other regulatory constraints prevent development of new supplies in most of the country.  Drilling is prohibited offshore the West Coast, the East Coast, the North Coast, and most of the South Coast.  Only offshore Texas and Louisiana can be developed and those areas are so picked over that new wells lose over 50 percent of their productive capacity in the first year and another 50 percent in the second before they go into a steady prolonged decline.   

In Wyoming, development of gas fields is prevented during most of the year by considerations of sage grouse mating and nesting, mountain plover mating and nesting, prairie dog activities, big-game mating, vacation periods (we cannot let a vacationer see a drilling rig; that might have a negative impact on the vacation experience) and various other considerations.  The period available for drilling is from 1 to 3 months out of the year.    

Operators with large lease positions will require decades to develop any significant amount of supply with these restrictions - that is, if they can get a permit to drill and find a drilling rig.  The federal administrative bureaucracies have developed an anti-drilling bias; drilling permits that used to require a few days now require months.  The average length of time to acquire a federal drilling permit from the Bureau of Land Management increased by 60 percent from 2001 to 2002.  Drilling contractors are reluctant to invest millions building drilling rigs and training crews that will be busy only for 1 to 3 months of the year and subject to an uncertain permitting process.   

Those in the industry who saw the repudiation of contracts and price incentives in the 1980s have little faith in government incentives or guarantees.  This skepticism is reinforced by increased bureaucratic opposition, proposed "Energy Bills" which are actually farm-relief programs mandating corn alcohol fuels, and drilling bans on leases after operators have paid significant acquisition fees.  Government has lost credibility.  The industry is generally relieved when an "Energy Bill" does not pass.