Where do you always find something? In the last place you look. Till you look in that last place, it’s “lost.”
Natural gas has been “lost” for years. The best of all possible fuels, clean and cheap, natural gas was supposed to be as lost as the Seven Cities of Gold. No amount of looking can find it, the experts said, because it isn’t there.
Three years ago, Washington made the loss official. The Department of Energy said that gas had gone on to glory, declaring it “probable that reserves will be exhausted by the late 1980s.” President Carter pronounced the benediction, telling industrial users to abandon the fuel.
Then someone looked in the last place. Below 15,000 feet in the earth’s crust. Where, it turns out, natural gas is nearly as abundant as rock itself.
So much natural gas has been found over the past few years that it’s now entirely possible to double U.S. consumption of this “vanished” fuel. This could be done, this magazine’s investigation shows, within the decade, and allowing for decades more of gas from domestic sources. Figuring in vast gas surpluses recently found in Canada and Mexico, it looks as if there is enough to power North America for at least a century—thousands of trillions of cubic feet of something supposedly “gone.”
Since President Nixon threw out the first softball to start the “energy crisis” game in 1973, natural gas has been the target of even more doomsday predictions than oil. Although gas currently supplies about one quarter of the country’s energy needs (with oil supplying one half and coal, 20 nuclear, and hydro covering the balance), its contribution is declining. This decline has the blessing of most government policy-makers, who still believe gas to be “gone.”
But gas supplies are not expiring, or even scarce. The gas market right now is glutted—a glut likely to increase, industry sources say, despite official contentions that it is “temporary.” Natural gas is so plentiful there is no reason not to use all we need. It is, in fact, the main reason there’s no “energy crisis” at all.
The about-face in natural gas supplies has a maddeningly simple cause. Because gas, unlike oil, has been price-controlled at levels that often made it unprofitable, prospectors didn’t look for it. They found gas only by accident, looking for oil. Oil deposits seldom occur below 10,000 feet, so no one drilled any deeper, except as a geological curiosity. They just assumed that the gas stopped where the oil stopped.
In 1978, natural gas prices were partially decontrolled in a desperate effort to wring out a few more years of this “vanishing” fuel. The results have been astonishing. Methodically drilling deep for the first time, prospectors made strike after strike. They found several fields that, in one place alone, contained more gas than DOE said existed in the entire world. They hit what one geologist called “mind-blowing” gas deposits in places no one had bothered to check before—under the Arctic, below the Gulf of Mexico, in formations of solid stone.
“You can’t sink a deep well without hitting the stuff,” says Roger Gordon of Seek Resources, an independent drilling firm. “You almost have to apologize for hitting gas so often.” It is possible that the hitherto unknown deep gas is below nearly every part of the country, straining for eons to roar to the surface and end what we like to think of as a “crisis.” The bulk of it is too far down to be of any use today. But so much has been found in accessible locations, available using today’s technology at prices lower than oil, that there is little doubt gas can replace oil as our chief energy source.
Does this sound to you like some sort of miracle solution, some simple-minded panacea for a complex problem? Good. Because that’s exactly what it is.
Rapidly expanding the use of natural gas would require only true decontrol of its price and lifting of legal barriers that actually penalize natural gas users. The gas cannot be employed to run cars, for it cannot be handled or carried like oil. But anything that sits still—factories, utility power stations, buildings—can use natural gas just as easily as oil.
Several obstacles stand in the way of such progress. (For details of an anti-oil conversion program, see “Why Not the Cheapest?,” page 31.) One is the belief that an “energy crisis” exists at all. The history of natural gas shows how confused regulatory policy both springs from this belief and creates evidence that seems to support it. Twenty-five years of unintentional price controls kept drillers from discovering the deep-gas bonanza below, helping usher in the “energy crisis.” Congress recently passed a law that, incredibly, bans construction of new boilers to burn natural gas, and stipulates that most industrial users of the fuel stop by 1990. Current natural gas policy seems guaranteed to make energy scarcer, pollution greater, industrial productivity lower, subservience to OPEC indefinite, and prices higher—in short, everything we’ve come to expect from Washington.
Clear Gold
It’s easy to believe energy policy is nonsensical, but not that things are so far gone Congress is actively scheming to make matters worse. In natural gas, it looks that way. The reason is that until recently, there was a tremendous body of evidence suggesting to the casual observer that natural gas really was disappearing.
That evidence consisted of years of declining gas in the national (or “interstate”) pipeline market; gas company figures that were deliberately distorted to make gas seem scarce, as part of a campaign against price controls; government studies doctored to make the shortage appear worse; and most of all, only preliminary reports, reports too sketchy for oft-burned regulators to believe, of the deep-gas bonanza. Weighing that evidence, Energy Secretary James Schlesinger said in 1977 that gas should be considered “gone.” His was the grumpiest voice of doom, but surely not the only one. Every government agency in the U.S. and Canada seemed to give up hope. It was in this spirit that the gas-banning Fuel Uses Act of 1978—which demands conversion away from gas—was passed.
Natural gas has been asking for trouble from the very start. It was first found, years ago, as the by-product of oil exploration. Oilmen considered it a nuisance. They erected huge torches—called “flares”—to burn it off. They knew industry would buy gas, but the logistics of moving it were bothersome. To sell gas, you need a pipeline. To sell oil, all you need is a truck.
Pipeline companies were slow in getting organized. “In the early days, you practically had to bribe a pipeline to come in and take the gas off your hands,” said David Foster of the Natural Gas Supply Association. So oilmen decided to offer pipeline companies the deal of the century—gas at the wellhead for three cents per thousand cubic feet (MCF), a gas measure that equals one-sixth a barrel of oil, or the equivalent of 18 cents per barrel. This “bribe” got the pipeline companies rolling. There was no pretense that three cents represented a reasonable price for fuel. Even Mother Teresa would have asked for more.
As pipeline companies developed, Congress imposed controls on their delivered price to customers. The reasoning was sound. Gas pipeline companies are utilities, and all utilities are regulated. Obviously, a customer served by a pipeline utility could not negotiate on a price any more than he could bargain for telephone rates. But Congress meant only to control the delivered price at the end of the pipe, not the wellhead price of gas as it came from the ground.
Meanwhile, customers became rather accustomed to getting their gas nearly free. They began to look on the “bribe” rates as the natural order of things, not a temporary oddity of economics.
By the early 1950s, some producers wanted to enter natural gas as a business in its own right, instead of a by-product of oil. One posted a price increase to four cents per MCF. Consumers were outraged, and filed suit. A series of dubious court decisions ruled that controls should be extended from the pipelines to the wellhead price, and handed price authority to the Federal Power Commission. Some Congressmen protested that such regulation had never been intended. But voter pressure for cheap gas was considerable. Oil companies gave in on this issue, being more concerned with far-more-profitable oil anyway. It soon became obvious that the FPC would seldom authorize a profitable price, so the fledgling gas exploration ground to a halt. Gas discoveries continued only by accident at oil rigs. Independent gas drillers either went into oil, or opened car washes.
But the federal-court-imposed price controls applied only to interstate commerce. Gas that stayed within its state-of-origin sold for whatever the market dictated. So within-state or “intrastate” production blossomed, mostly in Texas and Louisiana where gas was easiest to find. Pipelines to Northeast factories and homes continued to be built, and for a while prospered on the artificially cheap gas. But producers lost interest in filling them. Production costs sometimes exceeded the controlled price. Northeasterners argued that access to cheap gas was their right, in part because no cheap gas was located in their states. We don’t have any car factories here, but nobody offers us Chevies for less than they cost to manufacture, the producers countered.
By the mid-1970s, gas within Texas and Louisiana was selling for about $1.50 per MCF. Price-controlled gas was “selling” in Boston for 50 cents, selling in the sense that 50 cents was the posted price. Often there was none to be had.
The Northeast, seat of government, smelled conspiracy. Its leaders demanded even stiffer price controls. Some probably understood that controls were making their own problems worse. The Sun Belt factory shift leeching Northeast cities was hastened by the cheap, clean fuel available only down South. But politicians pressed for the popular controls anyway. (They also pressed for laws guaranteeing that first-priority gas use would be for home heating. This pleased voters who worried about freezing in the dark. It also, in effect, was another one-way ticket South for industry.)
Meanwhile, federal regulators began to assume that the national market, which touched them personally, was an accurate indicator of what was in the ground. They didn’t know about the deep gas any more than the industry did; but instead of 24 deciding to look for it, they circled the wagons to protect what was left. “Washington reads only the signs by its front door,” said a major gas company executive. “Lincoln Center had no natural gas, therefore there must be no more gas. That was all there was to it.”
The price-control mechanisms of the Federal Power Commission saw to it that even open-minded regulators could get nothing but pseudo-information. Gas producers could petition for a price increase only by telling FPC that stocks were declining. This made it in their interest to play along with the gas-crisis charade. Some producers deliberately falsified records to make it appear they were running short.
Eventually general panic set in, although all you had to do was examine the South’s within-state market to see a rosy picture. Gas was there, in abundance. Normal market mechanisms were bringing it out and setting the price, with producers under-bidding each other to win contracts. And, if you bothered to check, you saw that the market-set price was less than the OPEC-dictated price for an equivalent amount of oil. Southern producers weren’t worried about supplies; they were worried about surpluses.
Too Little, Too Chicken
Matters dissolved to theater of the absurd by the time the Carter administration took office. Carter zealously believed (out of, no one doubts, sincere motives) that the “energy crisis” was genuine. Cheap energy is gone, he had been convinced, and the expensive stuff may not be with us long either. Following the trendy “zero-energy-growth” line, Carter economists concluded that people would turn against energy only if the price skyrocketed. Unfortunately, the price-rationing idea found a receptive audience both with Big Oil and energy reformers.
Carter’s programs extolled the positive side of zero-growth—conservation to stop gluttonous waste and frivolous use—but also the negative side, that sacrifice was somehow good. Administration officials began to talk as if living in an energy-scarce society would actually be desirable. They spoke of shiny solar collectors to heat the swimming pools of the rich, never pausing to reflect on how many old folks used to die during every cold spell. They didn’t contemplate the Yugoslav proverb, “By the time the fat man is thin, the thin man is dead.”
All this set the stage for something called MOPPS, or Market-Oriented Program Planning Study, the first major action Carter asked of his new Department of Energy. MOPPS was to outline the next generation’s energy future. It would also provide statistical pylons on which to rest a gloom-and-doom fireside chat Carter planned to give, what later came to be called the Chicken Little speech.
As Fred J. Cook explains in a recent issue of The Nation, MOPPS’s boss, Dr. Charles Knudsen, started making trouble. A former Exxon geologist, he looked at some sketchy results from exploratory deep-drilling for natural gas and couldn’t believe his eyes. Drillers in the field seemed to be hitting natural gas everywhere, in unfathomable quantities. Knudsen talked to Dr. Vincent McElvay, head of the U.S. Geological Survey. McElvay said he expected a single deposit in Louisiana, something called the Tuscaloosa Trend, might have gas resources of 24,000 trillion cubic feet—more than a thousand years’ supply at current consumption rates.
But these results could be dismissed as preliminary. With gas prices still controlled, not much work was going on in the field, especially where the harder-to-reach deep gas was concerned. There was a small band of drillers and geologists who, willing to gamble that decontrol was coming, kept looking for the gas bonanza. They did not have complex sociological motives or write memos on policy initiatives. They just wanted to get rich.
Knudsen concluded, based on healthy skepticism about the early deep-drilling and conservative estimates of what was in the “reserve” supply—gas already proven and hooked into the system—that there was at least 500 trillion cubic feet of gas in the U.S. That was enough to last 25 years, even if another puff of clear gold were never found.
But the official administration position held that there was only 237 trillion cubic feet, with little potential for more. Matters came to a head three days before the Chicken Little speech. If natural gas were said to be plentiful, it would block Carter’s efforts to raise American oil prices to the OPEC blackmail price—foiling a profit windfall for oil companies and a tax windfall for government budget “balancing.” Also, it would spoil the fun of believing that the sky was falling. “All the DOE wanted to hear was bad news,” said James Gray, former head geologist at Kerr-McGee. “They absolutely fumed when you said, ‘Let the good times roll.’ I told them I thought energy was here to stay, and it would be even better than before because it would be cheap, pollution-free gas. I’d never seen such disappointed faces in my life.”
The only things to roll were heads. Knudsen was canned; McElvay was later fired, too. Schlesinger ordered MOPPS rewritten to predict doomsday. The frantic weekend rewrite session, one informed observer said, involved “basically making numbers up. Schlesinger said he didn’t care where the numbers came from, as long as they were bad.” Even though Knudsen had done the right thing, it turned out, in retrospect, that he was wrong. There was much, much more gas than he predicted.
Look Down, Young Man
In 1978, a new law called the Natural Gas Policy Act partially decontrolled the price of gas. It’s now at $2.55 per MCF, or about 40 percent the equivalent price of oil. This law, passed in the Chicken Little spirit with hands clasped over heads, was intended to ration remaining gas by making its price exclusionary. But it had the opposite effect. It encouraged the few deep-drillers, leading to the discoveries of natural gas abundance.
Gas is flowing again, at a profit, to the Northeast. The country is using 19 trillion cubic feet a year (TCF), about a quarter of total U.S. energy production, with no prospect of supply interruptions. (Canada is using 1.5 TCF, also about a quarter of its power.) But the law, while it has eased the pain, is still designed with a terminal patient in mind. It contains 23 categories of different prices for different classes of gas, an arrangement “incomprehensible even to a computer,” one gas company executive said. The law also sets higher prices for gas extracted with more expensive rigs— essentially, a reward for inefficiency. It will not allow gas to be truly decontrolled until 1985.
So the real boom in gas production won’t come until then. “Gas drilling has yet to begin in earnest,” says Gray. “Oil still offers a much higher return, so everyone’s looking for that. You won’t believe what you’re seeing when the gas starts to flow in 1985.” How could you have gotten the inside track on drilling breakthroughs in the making? Surely some clandestine source, some operative versed in international intrigues, would have sold you this information if you had connections. Perhaps it was alluded to in classified documents, or whispered about in closed Senate hearings. Or, you could have tripped over the November 1978 issue of National Geographic. It contained a comprehensive article about deep gas finds likely to be made under higher prices. A formula for ending the alleged “energy crisis” lay on the coffee table of every politician and government official in America. They were too busy applying for memberships in the Club of Rome to notice.
Basically, the only trick is to drill deep— anywhere from 15,000 to 30,000 feet. Technologically, this was considered impractical until a few years ago. And economically, it was considered pointless, since any deep gas you might find would cost more to produce than the regulated price. Deep-drillers rapidly found vast amounts of gas in a formation called the Overthrust Belt, which parallels the Western slope of the Rockies. (The Belt is sometimes called a shallow deposit because some of its gas is above 15,000 feet.) The Colorado School of Mines had been saying for years that the Overthrust Belt would be lined with gas. No one believed them. When the bores finally went down, every one seemed to strike.
There is another formation, similar to the Overthrust Belt, running alongside the Appalachians. It probably holds great deep-gas resources too, but is largely unexplored. As one veteran geologist points out, “You can never tell until you actually strike something with a drill. There is no reliable test except drilling.” Unexpected gas is also being found in numerous “deep basin” formations. There, lens-like shields of sandstone compress gas into small, hard-to-hit domes. When a drill pierces the lens, gas rushes upward to escape the pressure. The Anadarko Basin, underlying most of Oklahoma, bulges with such gas. Another productive new basin is 26 the Elmworth Field of Alberta, the Canadian province above Montana. KerrMcGee’s Gray formed his own company, Canadian Hunter, out of a conviction that Elmworth could be the biggest field of them all, even though shallow-drilling oil companies had written it off as hopeless. A few years ago Gray’s drills started hitting and haven’t stopped. So far he has found about 150 TCF of reserves in Elmworth. Gray believes that, as price increases and drills improve, this single field will produce 400 TCF—more than Schlesingers gloomsday prediction for the rest of time. Gray thinks there are similar as-yet-unsuspected major fields in the U.S.
Other new sources of gas are springing up. Many old wells, sucked clean of cheap gas near the surface, have been drilled deeper and show promise of producing more than they did in their earlier lives. Hundreds of TCF of gas have been found and “capped”—sealed over—in other parts of Alberta and around the Prudhoe Bay oil fields in Alaska. The pipeline intended to carry this gas across Canada and into the U.S. is mired in regulatory squabbling.
A further source is “unconventional” gas pockets, formations just being probed against the promise of decontrolled prices. Coal miners, for instance, have been dying in methane explosions for years. But until now, no company has tried to bring out the methane before the coal. Coal-seam gas in known coal deposits might hold 850 TCF or more of methane.
Regions like the Tuscaloosa Trend contain something called “geopressurized gas.” This exotic substance is a fountain of controversy among geologists. Apparently, natural gas can dissolve into salty brine formations under the Gulf of Mexico and other bodies of water. Years ago, oilmen sank bores into the geopressure zones. After they ran dry of oil, they began to fill with water. Water is the oilman’s foe. It usually means the end of his strike, or the fouling of his petroleum. So the watery wells were capped and forgotten.
But then enterprising geologists let a few wells run their course to see what would happen. After the water was pumped out, gas began to flow—in staggering quantities. The release of water lowered pressure enough for gas to pop out of the brine. Experts disagree on how common this phenomenon will turn out to be, or how much it will cost to exploit. A company called Transco Exploration is profitably taking 60 billion cubic feet a year out of its field in the Trend. Transco’s field, the first geopressure deposit to be explored systematically, is believed to hold at least 6 TCF.
Other gas is known to be preserved in the Devonian shale formations of the Appalachians; in “tight sands” throughout the west, slate-like slabs of rock that must be cracked open with hydraulic pressure; and most intriguing, frozen beneath the polar caps.
What may be below 30,000 is not known. Geologists once operated on the deeply-rooted assumption that, since gas was the product of decomposed plants and animals, it “had” to be near the surface and life-giving sunlight. But recent evidence suggests that gas may actually be the result of primitive anaerobic bacteria that secreted hydrocarbons, or even compounds formed in the lifeless atmosphere of prehistory. This, coupled with new understanding of the tectonic-plate nature of rock formations—which shows that, through time, whole continents have been tossed about like divots—suggests that the gas may keep going deeper and deeper down.
Joining the Reserves
So how much is enough? The “how much?” question makes even the most optimistic energy assessment seem like a good reason to pack the pup tents and tuna cans and head for the hills. Official “how much?” numbers are always spooky.
In part this is because people tend to assume that all of the earth’s crust has been explored and analyzed. They don’t grasp that in gas, unlike oil, exploration has just begun. People also find it hard to understand that drilling is basically guesswork. As Rep. David Stockman says, “Ninetyseven percent of the potential gas-bearing deposits in this country have never been disturbed by a bore.”
Therefore, the only true answer to “how much?” is “who knows?,” which is hardly reassuring.
Another source of perpetual confusion is the terminology used by energy companies. They have always gone out of their way to use the most confusing words possible. Big Oil often finds confusion rewarding. If you have to negotiate with The Washington Monthly/October 1980 27 the government over a controlled price, you do better if you can confuse them into thinking you are hurting.
The secret words are “reserves” and “resources.” Reserves are those areas that have been disturbed by bores, mapped, and quantified. “Resources” are those deposits believed to be present, but not confirmed. (There are numerous other categories for unexplored areas that seem promising, which is most of the globe.)
Supplies get transferred into the magic “reserves” column only when the price justifies bringing them out. A mapped and quantified field of gas that could be produced for $2 per MCF would not have appeared on anyone’s “reserve” charts a few years ago when gas was selling for less. Its existence would be well-known to the company that found it, but never reported in official surveys. So when the Gas Policy Act hiked prices in November 1978, vast amounts of gas suddenly were reclassified as reserves. This made it seem like the gas companies had been withholding.
Reserves are essentially a producer’s inventory, what he has in stock for delivery. It costs him money to hold reserves—money to drill for them, money to lease the land they lie under. No sensible businessman would go on forever stacking up reserves—inventory—for their own sake. Yet when people hear that the official reserves figure for natural gas is 11 years, they panic. They think this means the country will run out in 11 years. What it means, in fact, is that 11 times what we need this year could be rammed into the system now. The figure has nothing, utterly nothing, to do with when we “run out.”
Compared to other industries, where a low inventory is a badge of success, the reserves figure is astounding. General Motors likes to keep a 50-day supply of cars on hand. Nobody worries that we will “run out” of the Seville Biarritz, even though cars are made from energy, hydrocarbon-based plastics, and non-renewable metals. The “reserve” of beer is only a few weeks, yet we press on regardless.
The official 11-year figure comes from the sleek oracles of DOE. The Colorado School of Mines, which has repeatedly outguessed experts in the past, puts our current reserves at 1,100 TCF, or a 55-year supply. Gray, who is making a great deal of money by trumping even optimists like Mines, puts reserves at 1,400 TCF, a 75- year supply. Even if that’s all there is, and U.S. consumption is doubled, as this magazine suggests, it would supply our needs for 35 years—time enough to set in place permanent energy solutions.
But that’s not all there is. Add reserves of 200 to 500 TCF in Canada. Canada is willing to sell us 1 TCF a year of natural gas via a “prebuild” section of the Alaska Highway Pipeline. The plan is to ship Albertan gas to Chicago via the prebuild, then later extend the line to Prudhoe Bay to reach the vast Alaskan reserves. Officially the prebuild line has cleared planning hurdles, but practically it is years away. The greatest single impediment, informed Canadian officials say, is lack of interest from Washington. One official noted, “First they told us they didn’t want the pipeline, because there was no more gas. Here we were offering to sell it, and they said they couldn’t use it because there wasn’t any. Now they say they don’t want it because there’s a gas glut on the U.S. market. U.S. natural gas producers want protection so their prices don’t fall. They say there’s a glut at the same time they’re ordering people to convert off gas to fight a shortage. Care to explain that?”
Mexico, so far, has found at least 100 TCF of gas reserves, all as the accidental result of oil drilling. Mexico’s flaring off the gas to be rid of it because, again, the U.S. isn’t interested. In his dedicated pursuit of doomsday, Schlesinger rebuffed Mexican officials who offered long-term contracts for gas. After he was widely criticized for his imperious manner with the Mexicans, Schlesinger tried to save face by signing a later pact. But it was for an insignificant amount of gas.
If Mexico has approximately the same amount of gas as other oil-bearing lands, it could easily find 1,000 TCF in a few years, gas industry experts believe.
All these figures say nothing for the “resources”—unfound gas and all the new “unconventional” prospects. Geopressure formations in the Trend alone, it’s now believed, may ultimately yield 60,000 TCF. The tight sands hold at least 300 TCF. Devonian shales have another 1,000 TCF of reserves (of an inconvenient nature, because it flows up slowly). Prudhoe Bay has resources of at least 60 TCF on land and another 300 TCF offshore. The resources in Alberta, Canada’s Northwest Territories, and the Arctic might equal all these.
“It’s an exaggeration to say we can lay our hands on a thousand years’ worth of gas,” one prominent gas executive said, “but not by much.”
Big Oil’s Bane
But what’s to prevent the gas business from becoming another empire like oil, with a handful of big companies dominating supply and pumping up prices?
Here comes a surprising fact of gas. The business is mostly made up of smallish firms, few of them integrated. There are even—say this softly, so as not to jinx them—independent entrepreneurs.
According to a 1979 Federal Trade Commission study, the eight largest gas producers control less than half the market, about 45 percent. That percentage, FTC says, is about the median for all manufacturing, and below the levels needed for monopolistic strangulation. Also, FTC says that vertically integrated companies, which both produce and market gas, are rare. Most specialize in exploration or production, leaving pipeline companies the job of transmission and sales. Only a few companies, like Tenneco, do all these.
Big Oil, which has gobbled up the coal and uranium businesses with gusto, stays sour on gas. Big Oil’s objection to gas development is obvious—the fictional energy crisis, driven by OPEC supply constriction and political panic, is the only thing keeping energy prices so high. If OPEC were broken and energy were understood to be plentiful, the free market would react by driving energy prices down.
Although Big Oil would doubtless respond to such developments by trying to buy up gas companies and restrict supply, it would have problems it does not encounter in oil or coal. Gas exploration and production are relatively easy fields to jump into. Skill is required, but capital costs are manageable, and financing is readily available to independents. “Last time I needed $15 million I put the word out and left town for three days,” said a Denver independent driller. “When I came back, the answering machine had offers for $25 million.” Thus, it is impossible for Big Oil to stop thousands of independents and significant numbers of medium-sized companies from going into competition over gas.
Equally important, gas does not involve high production costs. Unlike oil, gas is not refined. It is basically stripped of moisture and compressed. This is the main reason it is so much cheaper than oil. This also means that no elaborate, expensive, time-consuming refinery construction is required of the gas competitor. Big Oil controls oil in part by owning the refineries that all small wildcatters must sell to; this leverage does not exist in gas.
Independents have a particular type of desire for money that serves true market-pricing perfectly. That is, they want it now. Whenever an independent finds gas, he wants to sell immediately, either to get more capital for more exploration, or just to wallow in the profits. (Since independents are closely held, the bosses get immediate money gratification.) A major company, which generally has access to cheaper loans, can afford to sit on a strike and see what happens. Thus independents are the great equalizer, playing a free-market role that goes far beyond their romantic stereotypes. By selling fast, they insure that supply is not artificially restricted. Of course, Big Oil has shown itself to be remarkably resourceful when it comes to deflecting challenges. It will no doubt attempt to manage independents by buying their strikes with the up-front money independents want. But at least the competitive potential of this factor exists, complicating Big Oil’s monopolistic dreams.
Under the federally imposed price of $2.55, guess what everybody sells for? Competition has little, if any, relevance. Of course, if Congress got religion and lifted controls tomorrow, the first effect would be for prices to rise (though experience with the within-state market shows prices would not rise to the blackmail price of oil). Then after a while, as many competitors jumped into the field, prices would start back down. Suppliers would undercut each other to get business, the same way they do in aluminum siding and human-hair wigs.
There is one other factor that makes the beauty of all this shine. Most of the rich new reserves like the Overthrust Belt and Montana’s Williston Basin are under federal lands. This means Washington can take a simple, easy step against the formation of a menacing Standard Gas conglomerate. It can limit the percentage of federal leasing rights any one firm can hold. By setting a low limit, it would insure a large, diverse group of competitors anxious to cut each other’s throats at the bargaining table.
And here is the kicker—leasing federal lands for gas production will mean royalties for the Treasury. This will be a welcome change from paying tributes to OPEC, by way of military expenses in the Persian Gulf and revenues lost to Big Oil’s foreign tax gimmicks.
There is not much reason to fear the despoiling of the wilds in gas expansion. Gas is not only clean to burn, but clean to mine. It cannot “spill” because it is colorless, odorless, and tasteless. The gas you smell around the kitchen stove is deliberately tagged in pipelines with nose-wrenching aromas, as a precaution to warn of leaks. Assuming any kind of rational management, gas production in parks should not cause environmental insult.
Distinguished With a Pipe
A technical drawback could be the ability of the pipeline system to handle gas transmission increases of the magnitude the situation suggests.
There are more than a million miles of gas pipelines in place, most of them along the Eastern seaboard. Pipes to factories and utilities forbidden to burn natural gas have not, thankfully, been ordered torn out and shipped to Riyadh as modern art. They’re still in place.
Carl Erickson of the American Gas Association says that a 50-percent increase in gas consumption, from 20 to 30 TCF yearly, “would be no problem for the existing lines, all of which operate under capacity.” Doubling from 20 to 40 TCF would require new construction, he says, but “the pipelines would still not be a factor. They’re the easy part.” Existing pipes have sufficient rights-of-way so that few virgin lines would be cut; present ones would be enlarged or “twinned” like bridges.
Here is another reason why Big Oil and Congress are prejudiced against gas, because it is another point at which oil and gas part company in a manner that favors the consumer. Pipelines are utilities with regulated charges. The cost of a pipeline is fixed and doesn’t vary much with volume, unlike the costs of oil delivery trucks, which are variable and almost exactly linked to volume. Say a pipeline costs $ 1 million a year. That expense is pro-rated over whatever amount of gas flows through the pipe. So if this million-dollar pipe carries only a single MCF a year, the transmission charge to the consumer is $1 million per MCF. If the pipe instead carries a TCF, the transmission charge drops to one tenth of a penny per MCF.
The current wellhead price for gas is $2.55 per MCF. But that accounts for only about 40 percent of the final cost to the consumer; pipeline charges, not the “price of gas,” account for 60 percent.
Given this, it is actually possible for the cost of gas to increase while the price to the consumer declines. Increased loads in a pipeline can drop the pro-rated transmission charge faster than the raw-material wellhead price increases. Remember, the consumer pays more to the pipelines than to the gas producer. It creates an ideal situation—higher payments to producers, to encourage them to explore for more, and lower prices to consumers.
Unfortunately, in the present imitation-doomsday system, this phenomenon has only been observed working in reverse. During the government-imposed natural gas shortage of 1977, when southern gasmen refused to sell to regulated interstate pipelines because free-market intrastate pipelines were paying three times as much, Northeasterners acted with righteous fury. In the name of consumer protection, they demanded a further rollback in the federally controlled gas price. This was supposed to be their revenge on the mustache-twirling gasmen who were tying them to the tracks. Producers, you maybe shocked to learn, reacted by supplying even less gas to national pipelines.
The result was that the volume of gas carried by national pipelines fell. Transmission charges per unit of gas soared. Total costs to Easterners rose even as their purchases declined, because of the pipeline-loading factor. By taking care of people’s interests for them, selfless government had managed the impressive feat of providing homeowners with less energy for more money.
This lesson was not lost on the regulators. They studied it carefully. And they used it as the model for the rest of the country’s energy policy.
