Abstract

Extensive market research has shown that volatility is the only characteristic that is constant in the natural gas marketplace. Methods which simply tie natural gas prices to crude oil prices as a predictor are, at best, inadequate and dangerous.

A more useful and realistic gas market assessment can be obtained by studying the relationship among key parameters within the market. Among others, population-weighted heating degree days, amount of gas in storage, demand growth, total deliverability, seasonal volatility, and net imports all have a profound influence on price.

These factors are presented in four separate cases using a dynamic, intertemporial simulation model. To address more 'What If" questions, the algorithm is perturbed with variables such as the assumption of the mildest winter on record, followed by the coldest spring on record. The four cases presented are considered to be 'mainstream' conditions that will most likely exist, however, some extremes are imposed to account for the unusual.

Introduction

History is rich with interesting metaphors concerning the natural gas industry. In the early 1900's, natural gas was perceived as an unwanted by-product associated with oil production. Today, it is an important contributor to the supply of our nations energy needs and, in turn, a key component of economic stability. Unfortunately, the fundamentals of natural gas have represented a puzzling paradox to domestic producers, consumers, and legislators.

In the 1920's many states had legislation that prohibited the sale of gas across state lines. The Supreme Court ruled that this legislation was unconstitutional and that national interests would require uniformity. The Congress, on the other hand, was completely silent, with the inference that natural gas should remain unregulated. As a result, producers and consumers would be left in a state of uncertainty amounting to no state regulation and freedom from federal interstate control.

The Natural Gas Act of 1938 gave the Federal Power Commission the power to regulate interstate sales and left the issue of sales within state boundaries to the discretion of the states. At that time, it should have been predictable that enormous pricing discrepancies between the two markets would emerge, resulting in an interstate shortage. Forty years later, the Natural Gas Policy Act of 1978 (NGPA) was enacted by Congress to address the emerging interstate shortage. The intent was the gradual price deregulation across the industry. However, the oil price shocks of 1973-74 and 1978-80 caused a reversal in focus away from the natural gas legislative process. The nation believed that we were rapidly running out of indigenous energy. Suddenly, the industry found itself in a state of dynamic transition while being politically driven out of major markets through such legislation as the Fuel Use Act and various administrative policies.

Indeed, historically, opinions varied greatly among experts regarding the natural gas market.

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