Alternative Regulatory Policies for Dealing with the Natural Gas Shortage

Paul W. MacAvoy and Robert Pindyck

Bell Journal of Economics, 1973, vol. 4, issue 2, 454-498

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.

Date: 1973
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