Natural gas users may not have last laugh much longer
Boston — Natural gas consumers are in for a shock. If deregulation continues on its present course, the clean-burning fuel in 1985 will cost far more than it does today.
The looming increase, which could double prices for natural gas customers, is heating up industry debate over how to deregulate the nation's second-most important fuel (after oil) without severely penalizing users.
''The gas consumer has got to get used to the real world that the oil consumer is facing right now,'' says David H. Foster, president of the Natural Gas Supply Association. He predicts decontrol would encourage producers to drill 10 to 15 percent more natural gas and maintain that output well into the next century. ''Producers are confident that we will find more gas.''
Even with more gas and free-market competition, however, experts say the era of cheap natural gas is coming to an end. Many predict the price will eventually settle at a level slightly below heating oil. The ones most hurt, they add, are gas-consuming homeowners, who cannot switch to another fuel as easily as industrial users.
Latest figures show that natural gas consumers pay an average $3.58 per 1,000 cubic feet, while oil consumers pay $7.21 for an equivalent number of Btus. The disparity is even greater at the wellhead, where the average gas price in May was $1.77 per 1,000 cubic feet, compared to $5.86 for the oil equivalent.
After 27 years of federal regulation, the reasons for decontrol of natural gas prices are twofold. First, the current pricing mechanism is a chaotic affair with 27 different categories and prices that range from about 26 cents to $10 for 1,000 cubic feet of natural gas, according to the Natural Gas Supply Association. Second, experts say the price needs to increase to encourage production. With the decontrol of oil, many observers see no reason why natural gas should remain the only major energy source subject to strict federal regulation.
The question for legislators, however, is how to deregulate without hurting consumers.
Under the present decontrol policy, called the Natural Gas Policy Act of 1978 (NGPA), prices for natural gas slated for decontrol will increase by a nominal rate plus the inflation rate until 1985, when controls come off ''new gas.'' New gas, 40 to 60 percent of the current US supply, is defined as gas coming from wells drilled in 1977 or after. ''Old gas,'' from pre-1977 wells, remains controlled.
Although the goal of NGPA is to bring gas prices into line with oil prices by 1985, Mr. Foster says, ''The price schedule was based on a prediction of what the world price of oil would be, and that prediction was wrong.'' Instead of the NGPA target of $15 a barrel, oil prices have more than doubled since 1978. Meanwhile, average gas prices at the wellhead have lagged further, climbing only about 60 cents since the 1979 average price of $1.17 per 1,000 cubic feet.
Thus, experts predict that 1985 deregulation will bring huge increases as gas prices try to catch up with oil. Some analysts say the price jump will squeeze residential gas consumers, fuel inflation, and force some industrial users to switch to oil.
Immediate decontrol of gas prices has been suggested as one alternative to NGPA, but a study by the American Gas Association forecasts that immediate decontrol of all natural gas would have a negative impact. According to the AGA, immediate deregulation would rapidly double prices for gas-consuming homeowners, raise the inflation rate, cause a 10 percent decline in gas demand as industry switched to oil, which in turn would force the United States to import 800,000 more barrels of oil a day.
The AGA, which represents local utilities and pipelines, prefers the NGPA schedule to immediate deregulation.
However, another alternative has been put forward that would speed up the NGPA deregulation schedule. The idea behind accelerating deregulation would be to allow prices to rise faster sooner so that the price increase in 1985 would be less drastic.
Earlier this year, the President's Cabinet Council on Natural Resources and the Environment recommended a three-year decontrol plan, but President Reagan has yet to decide on the matter, says Danny J. Boggs, the senior Reagan energy policy adviser.
On Capitol Hill, a bill similar to the decontrol plan has been introduced by Rep. Phil Gramm (D) of Texas. He proposes to immediately deregulate gas from wells drilled on or after Jan. 1, 1981 - so-called ''new new gas'' - and allow prices for all other natural gas to increase more rapidly than under NGPA. Another difference with NGPA is that in 1985 controls on all gas are lifted, whereas NGPA only deregulates 40 to 60 percent of the gas.
But winning congressional support will be politically difficult, observers say. With an election just one year away, few congressmen are likely to vote for measures that would immediately increase fuel bills for the constituents back home. The bill has not yet been scheduled for subcommittee hearings.
No matter what decontrol schedule does emerge, prices will go up dramatically , especially for homeowners and businesses who cannot switch over to other kinds of fuel as easily as industrial users. This leads some to wonder if converting to natural gas makes as much sense for the homeowner as it used to.
''I'm a homeowner and I have an ancient oil burner,'' says Wayne Riley, executive editor of Oil & Gas Energy Newsletter. ''Over the years I've toyed with the idea of switching to natural gas. But (now) I personally feel it's not economically justified in my situation.''
Central to the debate over deregulation is the effect a large rise in natural gas prices will have on the nation's economy.
A recent study by the Energy Information Administration suggests that immediate deregulation of ''new gas'' would be more advantageous in the long run than the NGPA schedule. The study finds that, compared with the NGPA, immediate deregulation would:
* Reduce imports of oil and gas by an average 540,000 barrels a day during the 1982-1985 period.
* Force natural gas prices up 10 percent higher in 1982, but keep the 1985 price 20 percent lower.
* Mean a $21.5 billion increase in real GNP over the 1982-85 period.
* Increase inflation slightly at first, but reduce it in the long run, with the consumer price index 2 points higher in 1982, but 3.9 points lower in 1985.
The analysis states, however, that it is based on a set of assumptions that may not hold true under free-market conditions. One problem facing the industry is that few comprehensive analyses on pricing have been made, observers say.