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Alternative Regulatory Policies for Dealing with the Natural Gas Shortage

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  • Paul W. MacAvoy
  • Robert S. Pindyck

Abstract

Low wellhead ceiling prices over the past decade have led to the beginning of a shortage in natural gas production. If the demand for gas grows as expected during the 1970s, and if ceiling prices remain low as a result of restrictive regulatory policy, this shortage could grow significantly. This paper examines the effects of this and alternative regulatory policies on gas reserves, production supply, production demand, and prices over the remainder of this decade. An econometric model is developed to explain the gas discovery process, reserve accumulation, production out of reserves, pipeline price markup and wholesale demand for production on a disaggregated basis. By simulating this model under alternative policy assumptions, we find that the gas shortage can be ameliorated (and after four or five years, eliminated) through phased deregulation of wellhead sales, along the lines proposed in President Nixon's April 1973 Energy Message. But the shortage is not reduced by changes in regulatory rulings on prices, even when the rulings allow price increases that are the maximum likely to be acceptable to the Courts. These results are rather insensitive to alternative forecasts of such exogenous variables as GNP growth, population growth, and changes in the prices of alternate fuels.

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Bibliographic Info

Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 4 (1973)
Issue (Month): 2 (Autumn)
Pages: 454-498

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Handle: RePEc:rje:bellje:v:4:y:1973:i:autumn:p:454-498

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  1. Westfield, Fred M, 1971. "Methodology of Evaluating Economic Regulation," American Economic Review, American Economic Association, vol. 61(2), pages 211-17, May.
  2. MacAvoy, Paul W, 1971. "The Regulation-Induced Shortage of Natural Gas," Journal of Law and Economics, University of Chicago Press, vol. 14(1), pages 167-99, April.
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Cited by:
  1. Boyce, John R. & Nøstbakken, Linda, 2011. "Exploration and development of U.S. oil and gas fields, 1955-2002," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 891-908, June.
  2. Machiel Mulder & Arie ten Cate & Ali Aouragh & Joeri Gorter, 2004. "Gas exploration and production at the Dutch continental shelf: an assessment of the 'Depreciation at Will'," CPB Document 66, CPB Netherlands Bureau for Economic Policy Analysis.
  3. Villeneuve, Bertrand & Creti, Anna & Chaton, Corinne, 2005. "The Economics of Seasonal Gas Storage," Economics Papers from University Paris Dauphine 123456789/11515, Paris Dauphine University.
  4. Davis, Lucas W & Kilian, Lutz, 2007. "The Allocative Cost of Price Ceilings: Lessons to be Learned from the US Residential Market for Natural Gas," CEPR Discussion Papers 6142, C.E.P.R. Discussion Papers.
  5. Lucas W. Davis & Lutz Kilian, 2008. "The Allocative Cost of Price Ceilings in the U.S. Residential Market for Natural Gas," NBER Working Papers 14030, National Bureau of Economic Research, Inc.
  6. Fan, Joseph P. H., 2000. "Price uncertainty and vertical integration: an examination of petrochemical firms," Journal of Corporate Finance, Elsevier, vol. 6(4), pages 345-376, December.
  7. Villeneuve, Bertrand & Creti, Anna & Chaton, Corinne, 2008. "Some economics of seasonal gas storage," Economics Papers from University Paris Dauphine 123456789/5365, Paris Dauphine University.
  8. Dahl, Carol & Duggan, Thomas E., 1998. "Survey of price elasticities from economic exploration models of US oil and gas supply," Journal of Energy Finance & Development, Elsevier, vol. 3(2), pages 129-169.
  9. Jamil, Faisal, 2012. "Impact of different public E&P policies on natural gas reserves and production in Pakistan," Resources Policy, Elsevier, vol. 37(3), pages 368-374.
  10. Forbes, Kevin F. & Zampelli, Ernest M., 2002. "Technology and the exploratory success rate in the U.S. onshore," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(2), pages 319-334.
  11. Sterman, John & Richardson, George P. & Davidsen, Pål I., 1987. "Modeling the estimation of petroleum resources in the United States," Working papers 1900-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. Managi, Shunsuke & Opaluch, James J. & Jin, Di & Grigalunas, Thomas A., 2005. "Technological change and petroleum exploration in the Gulf of Mexico," Energy Policy, Elsevier, vol. 33(5), pages 619-632, March.
  13. ten Cate, Arie & Mulder, Machiel, 2007. "Impact of the oil price and fiscal facilities on offshore mining at the Dutch Continental Shelf," Energy Policy, Elsevier, vol. 35(11), pages 5601-5613, November.
  14. Iledare, Omowumi O., 1995. "Simulating the effect of economic and policy incentives on natural gas drilling and gross reserve additions," Resource and Energy Economics, Elsevier, vol. 17(3), pages 261-279, November.
  15. Doucet, J. & Littlechild, S., 2006. "Negotiated Settlements: The development of economic and legal thinking," Cambridge Working Papers in Economics 0622, Faculty of Economics, University of Cambridge.
  16. Doucet, Joseph & Littlechild, Stephen, 2006. "Negotiated settlements: The development of legal and economic thinking," Utilities Policy, Elsevier, vol. 14(4), pages 266-277, December.

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