In 1954, the Supreme Court told the Federal Power Commission (FPC) to set prices for interstate natural gas sales. Nearly two decades later, persistent gas scarcities developed, as artificially low prices - held down by the FPC - stimulated demand and dampened production.
Economic logic sometimes works slowly, but, in the end, it usually works. That is worth remembering, because Congress and the Carter administration seem determined to repeat the mistake of 1954. In the name of consumer protection, they seek to control gas prices.
Economic logic and political logic are at odds here. Ultimately, Carter's natural gas program risks increasing dependence on high-priced energy imports, worsening pollution from coal and aggravating fuel scarcities. But these problems would surface only with time. By then, another President and Congress may have to deal with them.
Meanwhile, Carter can maintain that he didn't cave into the oil and gas industries and that he acted simultaneously to protect consumers and solve the nation's long-term energy problems.
The basic gas strategic is simple: restrain prices for homeowners and raise them for business. The strategy aims to accelerate the shift from natural gas to coal. It assumes, not unreasonably, that business can shift better than individuals can.
Under the House-passed energy bill (HR 8444), the real price of gas for residential users (after adjusting for inflation) is supposed to be about the same in 1985 as in 1977. By contrast, the price for major businesses would have more than tripled. Industry would bear the burden of high-priced gas and, in addtion, would pay heavy "user" taxes on gas consumption.
If this approach has an abstract appeal, it may not work in practice. Neither the General Accounting Office nor the Congressional Budget Office thinks, for example, that the Administration's goals for coal conversion will be realized.
Even before Carter's program, electric utilities - which account for nearly 15 per cent of total gas consumption - had projected a 60 per cent reduction in gas usage by 1985. Just how much further consumption can be cut in unclear.
Coal requires huge storage areas, and many businesses don't have ample space. Air pollution requirements represent another impediment.
If a shortfall in coal substitution occurs, other flaws in the Carter program would magnify its effects. Restraining consumer prices minimizes immediate pressures for homeowners to conserve.
Meanwhile, for producers, the administration's proposal to put a ceiling on new gas prices of $1.75 per thousand cubic feet - to be adjusted annually for inflation - would limit new production. Even the House Interstate and Foreign Commerce Committee, which supports the $1.75 ceiling estimates the annual U.S. production would be 600 billion cubic feet greater in 1935 without it.
One almost certain consequence of holding down prices would be to fan demand for foreign fuel. Already, firms have stockpiled dual fuel as a hedge against gas scarcities.
More important, energy companies now look increasingly abroad for natural gas supplies. With gas consumption running at about 20 trillion cubic feet annually, foreign supplies could easily account for 10 per cent to 20 per cent of the total by 1985.
Canada already supplies about 5 per cent (900 billion cubic feet). A consortium of gas companies recently asked the FPC for permission to import 700 billion cubic feet from Mexico by 1985. Applications for the import of between one trillion and two trillion cubic feet of liquefied natural gas - mostly from Algeria - also have been filed with the FPC.
There is nothing inherently evil about imported energy. The Organization of Petroleum Exporting Countries (OPEC) has demonstrated that high-priced foreign oil is better than no oil at all. But OPEC also has demonstrated the need for restraints on foreign pricing power.
Most foreign gas is extremely expensive. The Mexican gas, for example, is estimated to cost $3.10 per thousand cubic feet in 1979 (when it begins flowing) against about $2 to $2.25 for the highest priced domestic gas today. Unfortunately, all Congress can do to check foreign supplies is to assure maximum production from U.S. reserves.
This it refuses to do. Contrary to the widespread impression, the alternative to Carter's program, deregulation, is not a consumer atrocity. Consumer bills would not double or triple. In 1976, that bill average $240, though in some areas the average may have been $400 to $600.
But only about a third of the average bill represents the well-head price of gas, which would be affected by deregulation. The other two-thirds reflects pipeline and retail transmission expenses. Finally, most gas is sold under long-term contracts, and only "new" gas - about 5 per cent to 10 per cent a year - would be affected by deregulation. All these factors would cushion the consumer prices increases.
What opponents insist is that deregulation won't result in much added production. It's hard to know, especially over a 10 or 15 year period. The administration implicity assumes that there isn't much gas left in the United States. Proven reserves, for example, stand only at 216 trillion cubic feet, or about 10 years' consumption.
But no unanimity exists on the availability of gas. The Colorado School of Mines estimates that "probable" and "possible" reserves total 578 trillion cubic feet, with another 354 trillion to 395 trillion cubic feet of "speculative" reserves. Gas tightly compressed in rock and sand - not counted, in these totals - could augment supplies further.
Just how high prices might go under deregulation is unclear. But if real pressures exist for higher levels, neither Congress or Carter can artificially shield consumers from the consequences. Confining the price increases to businesses will simply give an extra twist to general inflation. If energy scarcities result, the consumer impact would be felt through lower economic growth and higher joblessness.
In the end, environmentalists may most regret Carter's policy. Natural gas is the nation's cleanest fuel, coal the dirtiest. Carter hopes to cure the natural gas scarcities through a rush to coal.
Inevitably, coal use will rise, but the increase ought to be as constrained as possible. Natural gas deregulation is not popular, but a sound energy policy is not popularity contest. President Carter preaches this, but doesn't act as if he believes it.