March 14, 2006

March 14, 2006 | WebMemo on Energy and Environment

A Positive Step In Easing the Natural Gas Crunch

High gasoline prices have grabbed much attention over the past year, but the bigger story is natural gas. The rise in natural gas prices has been considerably greater and imposes serious burdens on consumers and industries that use natural gas. Yet even in the face of rising prices and growing demand, domestic natural gas production has been flat, largely due to legal and political constraints on drilling. A proposal from Sen. Pete Domenici (R-NM), S. 2253, would open a natural gas-rich portion of the eastern Gulf of Mexico to drilling. Meanwhile, the Department of the Interior is trying to accomplish the same goal administratively. Allowing drilling in this area would be a major step forward for U.S. natural gas supplies.

 

Throughout the 1990s, natural gas was cheap and plentiful, and policymakers became complacent about its future. Yielding to opposition from environmentalists as well as legislators from Florida and a few other coastal states, the federal government placed strict limits on new exploration and drilling, especially in offshore areas.

 

At the same time, tough Clean Air Act regulations raised the cost of coal-fired electricity generation, making natural gas an attractive alternative for utilities. As a result, most power plants built since 1990 have been natural gas-fired, putting pressure on supplies. In addition, consumer demand for natural gas was rising, as were the needs of natural gas-dependent industries, particularly chemical and fertilizer production, which uses gas as both an energy source and a chemical feedstock.

 

With limits on supplies and strong growth in demand, price increases were inevitable. Natural gas stayed around $2.00 per thousand cubic feet throughout the 1990s but has shot up since then, averaging $9.00 per thousand cubic feet in 2005. If the price of gasoline had risen that much in percentage terms, it would exceed $5.00 per gallon.

 

This rise has brought with it serious consequences. Electricity prices are higher, and only a remarkably mild winter prevented residential natural gas bills from skyrocketing these past few months. Natural gas-using industries have closed 100 facilities over the past decade, affecting as many as 100,000 jobs. Of the 120 major chemical facilities now in the planning stages or under construction around the world, only one is in the United States. Uncompetitive natural gas prices are largely to blame; the price of gas is sharply lower nearly everywhere else.

 

The good news is that there is a simple and obvious solution. A substantial amount of natural gas in the U.S. is not being utilized. According to several estimates, as much as several decades' worth of additional supply may today be untapped. Much of this potential lies offshore and would require policy changes from Washington to reach the market.

 

On February 7, Sen. Domenici, chairman of the Senate Energy and Natural Resources Committee, introduced S. 2253, which would open the so-called Lease Sale 181 area of the Gulf of Mexico for energy leasing. Domenici's committee passed the bill, 16 to 5, on March 8.

 

This gas-rich area-containing an estimated 6 trillion cubic feet of gas, as well as some oil-lies off Alabama and the Florida panhandle. The proposed drilling would occur well offshore and would not be visible from land. Technically, Lease Sale 181 is not one of the areas subject to federal restrictions on drilling, but strident opposition from Florida's congressional delegation has blocked its opening.

 

To address Florida's concerns, Domenici's bill would forbid drilling within 100 miles of the Florida coast. Despite this massive buffer, Sen. Bill Nelson (D-FL) has already threatened to filibuster the bill and Sen. Mel Martinez (R-FL) has introduced an alternative bill that would virtually outlaw new drilling within 150 miles of his state, thereby putting most of Lease Sale 181 off-limits. With this opposition, bipartisan support for the bill, already strong, will be crucial for it to pass the full Senate and the House.

 

At the same time, the Department of the Interior's Minerals Management Service is also trying to open Lease Sale 181 through an administrative procedure. Domenici and others believe that legislation would expedite the matter. Indeed, timeliness is one of the advantages of the 181 area because it lies near the existing pipeline system. This additional energy could be brought online quickly.

 

Lease Sale 181 is only one of many promising offshore areas currently blocked to development. Other proposals in Congress would go much further than Domenici's and give all coastal states the option to allow oil and gas drilling off their coasts. These bills would also give states a share of leasing and royalty revenues. These are good policies to increase gas supplies.

 

Anything Congress can do to increase domestic natural gas production will benefit those Americans impacted by high natural gas prices-that is, almost everyone. Opening Lease Sale 181 would mark the first significant expansion of domestic natural gas production in many years and could lead to other offshore areas also being opened. The nation's natural gas problem is a self-imposed one, and opening Lease Sale 181 is a first big step towards a solution.

 

Ben Lieberman is Senior Policy Analyst in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Ben Lieberman Senior Policy Analyst, Energy and Environment
Thomas A. Roe Institute for Economic Policy Studies