President-elect Ronald Reagan's free-market principles will face a quick and crucially important test next year when he decides whether to strip federal price controls off natural gas, a step that would add significantly to inflation.
Gas producers and some of Reagan's energy advisers are urging him to seek enactment of legislation to end controls as quickly as possible. Such a move could switch as much as $80 billion from gas consumers to producers.
But the interstate gas pipeline companies and local distributors strongly oppose full decontrol, fearing higher prices would so depress sales that their profits would suffer.
Residential, commercial and industrial gas users would find their bills, which are already rising rapidly, shooting upward. The Department of Energy's policy and evaluation section recently estimated that complete decontrol in 1982, for example, could add 2.4 percentage points to the increase in that year's consumer price index, no small burden for an administration dedicated to curbing inflation.
With this much at stake, and expecting Reagan to propose some form of decontrol, the various interest groups concerned are bracing for another, drawn-out battle in Congress, similar to the one that ultimately led to passage two years ago of the Natural Gas Policy Act. The NGPA raised most gas prices and paved the way for limited deregulation.
Gas producers probably will have a hard time selling full decontrol to Congress partly because the NGPA is working well, something that even most of its original critics concede. Natural gas supplies are more than ample at the moment, drilling for gas has set new records, and gas users, like consumers of oil, are finding ways to cut back. Some industry experts think figures will show that in 1980, for the first time since 1967, as much new gas will be found in the United States as is consumed.
Nevertheless, energy economists maintain that, as with oil -- on which the government is removing price controls -- so with gas: letting prices rise to free market levels is the best way to encourage maximum conservation by users and at the same time give producers the incentive and the cash to find further supplies.
Reagan's energy advisory task force took that view and urged "removal of all price and allocation controls on crude oil and natural gas . . . . Natural gas prices should begin phased decontrol over a short time period so that all gas prices are decontrolled as soon as possible."
The NGPA already calls for decontrol of newly discovered gas in 1985 with monthly increases for gas found in the meantime running at a rate 4 percent a year faster than inflation. Some especially high-cost gas, such as from very deep wells, has already been decontrolled under other provisions of NGPA.
For such reasons, congressional sources say, even the newly Republican Senate is not going to be all that anxious to push for full decontrol. Sen. James McClure (R-Idaho), the incoming chairman of the Senate Energy Committee, for instance, who was fully behind oil decontrol, has taken no firm stand on faster gas deregulation. f
Part of the political uncertainty stems from the fact that deregulation of natural gas is a far more complicated business than for oil. While the economic arguments for decontrol may be the same for both, the real world markets for the two fuels are far different. For instance, the "price" to be decontrolled is not the price paid by a homeowner who buys gas from Washington Gas Light Co. or Baltimore Gas & Electric Co., nor the price such gas distribution companies pay their suppliers, usually an interstate pipeline company. It is the price at the wellhead paid by a pipeline company to a gas producer.
Currently, the average price interstate pipeline companies are paying is about $1.65 per 1,000 cubic feet (mcf), a 44 percent jump from last year. One thousand cubic feet of gas has only about 18 percent as much energy as does an average 42-gallon barrel of crude oil. On the basis of energy content, and considering the higher cost of transporting gas long distances, a gas price of $1.65 per mcf is equivalent to less than a $10 a barrel price for crude oil, not the $38 or so crude will be bringing after the latest round of Organization of Petroleum Exporting Countries price increases this month.
In other words, producers complain, natural gas is selling for about one-fourth its true value. The wellhead price of gas should go up by nearly $5, they argue.
But a number of pipeline and distribution companies can't sell all of the gas they have available now -- partly because even the current price is too high for some industrial users who, as a result of an NGPA requirement, have to bear much of the burden of the price increases that have occurred so far.
Competition from residual fuel oil, a heavy fuel widely used to fire industrial and utility boilers, has been fierce this year, with "resid" selling at times for as much as $10 a barrel below the cost of crude oil. Cheap resid, for instance, has captured a significant share of the market for Canadian natural gas, which is exported at a high $4.47 per mcf. The markets for some companies are so slack that they are having to pay for gas they are not buying because of so-called take-or-pay provisions of contracts with producers.
Faced with the specter of lost markets, both the pipeline and distribution companies will try to block any attempt to decontrol all gas.
"Whether anything happens will depend on where the industry sectors end up," says a congressional energy expert. "The pipelines would fight deregulation of all gas because they have already seen their markets erode. Frankly, they are scared.
"The petrochemical industry [which for feedstocks uses about 5 percent of all gas consumed] was persuaded to go along last time, but they, too, would undoubtedly fight now," this source adds. Manufacturers of man-made fibers, fertilizers and other such products based on natural gas claim they could not continue to compete with cotton or with imported fertilizer. "They say they can't cope with full deregulation."
And consumer groups, of course, will join the chorus to prevent such an enormous increase in the bills residential users would pay.
Aside from these conflicts arising from competing interests, there are difficulties stemming from the fact that, unlike oil, natural gas prices have been controlled since 1954. "The question is how to get from a controlled environment to a decontrolled one, and over what period," says Charles B. Curtis, the out-going chairman of the Federal Energy Regulatory Commission, which regulates natural gas prices.
One problem, Curtis notes, is that most contacts between producers and pipelines were signed "in a time of shortage" with price escalation provisions that call for the highest price permitted by the government. With decontrol, "you could have all the gas prices going up without regard to all the economic judgments of the purchaser," he says.
Moreover, the $1.65 average price for 1,000 cubic feet of gas masks the fact that some gas is being sold for as little as 25 cents per mcf while other gas, being produced free of price controls from Alabama wells deeper than 15,000 feet, is bringing more than $6. If all gas were decontrolled, as Reagan's task force urged, then, there would be no opportunity to "roll in" such high cost gas with older, cheaper gas.
The pipeline and distribution companies are deathly afraid of what loss of this opportunity to average high-cost and low-cost gas would do to their total market. For instance, Canada and Mexico insist on pricing their exported gas at the border at the energy-equivalent of crude oil prices. But adding in transportation charges in the absence of averaging could all but eliminate the market for Canadian and Mexican gas in the United States, leaving the pipeline and distribution companies with less business.
The same grim arithmetic could jeopardize construction of the Alaska natural gas pipeline. Because of the high transportation charge, estimates of the delivered cost of that gas range to $7 per mcf or more. If there were no cheap gas with which to average that price, it probably could not be sold.
Most experts estimate that the conversion of residences, apartment and office buildings, stores and the like from fuel oil to gas will continue rapidly as long as gas costs less than home heating oil. The added gas they would require, however, likely will be more than offset by conservation by current users.
Thus, the size of the future market for gas turns on industrial and utility use. But such users, who may stand near the head of the line to get fuel in the case of an oil shortage, by law stand at the rear when gas is short. Utilities, in addition, under current law, cannot burn more gas than they did in 1974-76 and are generally supposed to cease burning it entirely by 1990 or soon thereafter.
If these restrictions were not lifted along with controls, the gas market almost certainly would shrink, not grow, even if new supplies were found with the incentive of higher prices.
With all these complications, decontrol of gas is far more complex than decontrol of oil and the prospects for it can only be described as completely uncertain, however hard a President Reagan decides to push for it.
"It will be a battle. That's all I know," sighs a House energy committee staffer who is not looking forward to it.