NTF
Issue Paper: Cong6. doc. 10-05
NEBRASKA TAXPAYERS FOR FREEDOM ISSUE PAPER:
THE NATURAL GAS CRISIS.
BACKGROUND. Natural gas supplies 24% of all energy used in the
U.S. Almost 58 million residences, or
61% of the total, use natural gas heating.
Its uses include electricity generation, residential and commercial
heating, feedstock for chemical and fertilizer industries, and transportation. It provides the energy source
or raw material to make a wide range of products, such as plastics, steel,
glass, computers, synthetic fabrics, fertilizer, medicine, automobiles, and
processed food. Gas provides about 38% of all primary energy
for industrial use and 13% for commercial facilities. It provides over 90% of
new electricity capacity built in the last 5 yrs.1 As a fossil fuel, it burns 50% cleaner than
oil and 85% cleaner than coal and emits less nitrogen oxide, sulfur dioxide,
and soot and fewer hydrocarbons and greenhouse gases. Natural gas abounds. It is our fastest-growing energy source, demand and
consumption forecast to increase almost 40% by 2025, including a more than 75%
increase for electric power generation.
The United States produced 18.8 trillion cubic feet of natural gas in
2004, but production has fallen flat for 20 yrs. Increased imports fill the gap. Reserves in the U.S. and Canada will meet demand for
100 years, though potential natural gas resources will last only 60 yrs. at
present production rates. In the 1990s,
natural gas was cheap and plentiful and expected to remain the same, an
attractive alternative to more expensive electric commercial and residential
heating.2 
THE PROBLEM. The congressional Joint Economic Comm. regrets
conflicting policies that encourage natural gas use but discourage development
of new supplies. Thus, since early 2000,
prices for natural gas have sharply increased, particularly in Midwest states,
a result of natural gas commodity prices almost doubling since 1999. These price hikes pass along directly to
consumers. Clinton Administration energy policies caused this crisis, because
Clinton issued executive orders to restrict oil and gas drilling on federal
lands in the West, where 67% of our reserves lie. Laws and regulations here appear prohibitive. Vast amounts of natural gas lie on federal
lands, in the Gulf of Mexico, off both coasts, and under the Rocky
Mountains. Fed lands contain 59% of our
undiscovered natural gas. Clintonites prohibited drilling here and cordoned off
to gas drilling the Alaskan wildlife areas.
Current fed policies restricting access and development have placed
substantial, new supplies off limits, enough gas to heat 100 million houses for
30 yrs. Lawsuits by eco-radicals block
development of other supplies. Banks refuse to loan to drillers, fearing that
prices will fall and cause uncollectable loans.
Pipeline construction is difficult or impossible because of Clinton
regulations. Producers have no incentive
to open capped wells or drill new wells. Clinton excessive rules and
regulations delay construction of new refineries. Our natural gas began flowing from Canada,
because Canadians realized the lucrative market here. Private energy exploration here has declined
60% since 1983. Since 1970, natural gas
production in the U.S. has declined by 14% while demand has increased 33%.
Domestic production has grown at a yearly rate of below 1%, because existing
and present gas fields in the U.S. are drying up. To maintain production, producers must drill
more wells and extract gas more efficiently from current wells.3
Demand grows by 3.5-4% annually, because clean-burning natural gas has
environmental benefits.1 1990s economic growth and outrageous crude
oil prices heightened demand for natural gas.
Several mild winters hid the gas shortfall until Winter 2000-01. When summer air conditioning season arrives,
gas use for electricity generation skyrockets, as do prices. Natural gas prices spiked high, so gas
companies mostly did not store gas in tanks, believing that prices eventually
would fall. Thus, reserved gas flowed out of 
pipelines quickly, leaving
no reserves. Harsh Clinton regulations
of power plants forced them to consume natural gas instead of oil or coal,
thereby draining gas that otherwise would have heated homes and businesses. Consequently, prices rose higher. Gas prices
at the wellhead spiked about 55% in Winter 2000-01. Most natural gas used in NE comes from
domestic sources, the remainder from foreign sources, mainly Canada. The Omaha
Public Power District in June, 1999 paid $2.41 for each million British Thermal
Units of natural gas burned. In June,
2000, it paid $4.45 for same. Nebraska
winters drain supplies. Regional stock
levels dropped 30% lower than the 5-yr. average. Contract prices rose, though the Metropolitan
Utilities District in Omaha had the foresight to purchase a goodly supply of
gas in Summer 2000, before prices spiked higher. MUD competed for gas supplies with users
around the entire nation. MUD
stockholders are its customers, who received dividends in the form of lower
rates than neighboring customers served by other suppliers. Federal regulations
produced similar shortages in the 1970s.
Oil and gas leases on fed land must comply with rigorous environmental
laws, like the clean air and clean water acts.
After paying for leases and complying with entangling regulations,
companies often face frivolous litigation from eco-radicals that prevents
preliminary exploration activities. We
cannot obtain great increases in supply short-term, because it takes years to
develop and produce new supplies and build pipelines to send gas to
consumers. Most Nebraskans will pay
about 63% more for natural gas in fall and winter 2005-06 than last year. Our average January, 2006 heat bill will
exceed $215.2
THE
ECONOMIC CRUNCH. Small businesses and large
industries that consume commercial amounts of natural gas are suffering.
Businesses concerned about energy deliveries will not sign contracts or make
investments based on such worry, causing a reduction in economic activity. Chemical plants are closing, foreign
competitors gaining their customers.
Natural gas prices affect electricity prices, because many
electricity-generating plants increasingly use natural gas as a power
source. New power plants fired by
natural gas have come on line, consuming 25% of natural gas production. Gas prices parallel higher oil prices,
because most big industrial users can switch from 1 fuel to the other. The prospect of continued high gas prices
will increase manufacturer costs and slow NE economic growth.
FLUCTUATING
PRICES. Supply restrictions have
caused higher prices and price volatility. The U.S. Energy Information
Administration noted that a typical residential NE customer spent $762 on gas
during the 2002-2003 winter, a 28% hike from the previous season.3
WE Energies predicted a 34% higher bill.
MUD customers paid about 50% more in March than February, 2003 because
of unexpected colder weather and low reserves.
MUD storage levels were about ½ of 2002, providing about 20% of gas to
customers, flattening fluctuating prices.
Prices on the futures market are high, so it will cost more to build
reserves, and negotiating new long-term contracts will see higher base
prices. MUD customers paid about 33%
higher prices in Winter 2004-05 than the previous year because of tight
supplies and increasing demand. The rising price of petroleum hurt. The price of crude oil stands at a 12-yr.
high. As these prices rise, industries
switch to natural gas, adding to demand.
During winter, residential heating requirements include total demand for
natural gas in excess of production and import capabilities. Withdrawal of gas from storage provides the
extra amount needed to meet customer requests.
The price of natural gas bases primarily on volume of gas going to your
utility, transmission costs to move gas by pipeline from source to local
utility, and distribution costs to bring gas from a utility to your house,
which constitutes the largest cost because of the massive network required to
deliver smaller gas volumes at many delivery points. Factored in also are commodity costs, the
price of the gas itself, which local utilities pass along to consumers. Although higher commodity prices pass along
to consumers, residential customers win protection from severe price
fluctuations, partly because residential bills reflect monthly average prices,
not daily market prices.4 Supply and demand dynamics determine natural
gas prices. There exists a 6-18 month
lag time between initial drilling and when product reaches market. Sometimes, supplies lag because of time
needed to ready new supply sources. It
will take months or years to increase drilling activity and connect new well
supplies to markets by pipeline. There
is plenty of natural gas in the ground; extracting it depends on new pipelines
and abatement of government regulations. Demand for natural gas has grown
faster than new pipeline capacity needed to transport gas to consumers. Supply is not increasing as quickly as
consumer demand, forcing prices longer term to remain high. Domestic gas production is 4-6% lower than in
2002. Production from many older gas
wells is declining rapidly.1 Most gas fields now producing are old,
returns lessening every year. Higher
demand resulted in quicker than usual usage of stored gas. Greater turnover in gas storage means
increased gas delivery costs.2 Storage supplies dropped 48% from 2002.3
Nebraska utilities typically lock in the price of part of their gas
months in advance and store it, allowing them to withstand price surges.
However, NE natural gas consumers paid about 6% more during the winter of
2003-04, about $850 more than the previous year. Local utilities must bid up prices to buy
enough gas to reserve for customers.
Prices could remain high for years.
Increased gas production costs to industry pass along to consumers.4
New wells have higher production rates than old ones. Higher production utilization rates result in
higher gas prices owing to increasingly tight market conditions. Total U.S. imports of natural gas during the
1st 10 months of 2002 rose more than 2% from 2001 levels. To meet demand levels, the gas industry must
tap new sources of supply. It must drill
offshore in the Gulf of Mexico and in sand and shale deposits on federal lands.5
Companies are drilling 18,000 wells per year, but gas production barely
rises, insufficient to meet demand. The
Energy Dept. projects a 45% increase in gas consumption by 2015, but the number
of gas wells drilled must reach 30,000+ per year, and domestic supplies will
continue to lag nevertheless. To
maintain current production, the industry must increase production per well by
23% every year. Thus, imports will
become more vital to our energy future.
Our energy needs will become more heavily dependent upon natural gas,
the cleanest of fossil fuels. Yet, Congress has barred drilling in the gas-rich
Gulf and national monument areas.6 Wholesale gas prices have soared 9.7%, the
largest gain in 8 months, because of expectations that subzero weather in the
U.S. will strain supplies.7 From Nov. 2002 through Feb. 2003, U.S. temps
were 15% colder than the year before.8 Natural gas prices have soared almost 50%
since 11-03 on the spot and futures markets.
Price hikes also drive up costs of byproducts like propane.
THE
SOLUTION. Vice-President Dick Cheney
has lengthy administrative experience in the energy industry and realizes the
economic pain experienced by American companies and consumers. He and President Bush have proposed a 10-yr.,
$7.1 billion energy recovery plan to Congress, which includes conservation, tax
incentives to drilling companies, drilling of gas in Alaska, the Rockies, and
offshore, building new pipelines, and waiving red tape, which stops states from
operating older power plants at full capacity. States, not the feds, would
regulate gas leases on federal land. Natural gas suppliers state that this
legislation will increase supplies greatly.
Cong. Lee Terry is on the House Energy & Commerce Committee and is
helping to prepare short and long-term plans to implement a comprehensive and
effective Bush energy policy.
Unfortunately, liberals killed the 2005 version of this bill. We must eliminate many federal regulations,
to cheapen natural gas and thereby boost economic growth and avoid power
blackouts. Prices continue to rise
because of residual Clinton regulations.
Repeal them. Prices probably will
not drop considerably, until new major gas pipelines connect new gas fields in
Alaska and NW Canada, so urge your congressman to make it easier for energy
producers to start this needed flow.9 Open up federal lands in the Alaskan
National Wildlife Refuge and Prudhoe Bay to drilling. 18% of our domestic reserves lie here. Energy
Sec. Spencer Abraham warned that price volatility will continue without
increased gas production. Notwithstanding a few price spikes, a free market
offers lower prices and heftier continual supplies. Allow companies easy access to fed lands
with huge natural gas resources, so that extraction can proceed coordinated
with streamlined permits, which now take 130 days to process, with backlogs of
over 2,800 applications, and other administrative procedures. Update resource management plans, necessary
for preparing lease sales and managing development on fed lands. Allow development of unconventional gas, like
coalbed gas. Permit additional imports of volatile liquefied natural gas and
build depots to accept it.10
OPPONENTS. Eco-radical groups like the Sierra Club whine about
giveaways to the polluting fossil fuel industry and lobby for additional
strangling regulations. They do not care
if we freeze or sweat to death in the dark.
These radicals refuse to acknowledge that we now import gas from nations
that have very lax environmental regulations.
Rock-hugging lobbyists have killed every congressional initiative to
cheapen natural gas.
TAKE
ACTION NOW. Contact your representative
and both senators to support legislation in both houses to 1) increase
supplies of natural gas to both commercial and residential users; and 2)
greatly lower the price we pay as consumers.
S.360 would treat natural gas distribution lines as 10 yr. property for
depreciation purposes. S. 696 would
extend a tax credit for marginal natural gas well production. HR 427 would
permit sale in many states of natural gas from other regions. HR 503 would allow a credit for the
production of oil and gas from domestic marginal wells. HR 794 would allow
development of federal gas and coal reserves.
HR 1468 would modify the depreciation of natural gas pipelines,
equipment, and infrastructure assets as 10-yr. property. Tell congressmen to offer tax incentives for
high-efficiency furnaces, boilers, and water heaters. Also, obtain home energy audits, so that all
appliances and furnace run efficiently.
Ensure that you have proper insulation in your home and water
heater. Lower the temperature on your
thermostat when gone from home.6 Install a programmable thermostat. Seal leaks around doors and windows and in
furnace air ducts. Change your furnace
filter regularly. 7
RESOURCES:
Competitive
Enterprise Institute, www.cei.org.
American
Petroleum Institute.
Research, documentation, and
analysis for this issue paper done by Doug Kagan and Teal Morris.
This material copyrighted by Nebraska Taxpayers for Freedom, with
express prior permission granted for its use by Citizens for Local Control,
Cherry County Taxpayers, Dawes County Taxpayers, and other groups in the Tax
Freedom Network. 10-05 C