The Natural Gas Price Gouge

The dentist was distraught and it was not about cavities. This dentist was part owner in several oil wells in western Pennsylvania and the mixed-in natural gas was being flared off–just burned away. Even though his wells were very close to gas pipelines, there were no willing buyers for this gas. The gas was for sale at a much cheaper price than what the gas companies were paying for their gas. Yet there were no takers. The dentist thought teeth were more orderly than the natural gas market.

It may be disorderly but it is also very cruel to consumers. At a time of decreased demand and a natural gas glut, prices are rising quickly. Homeowners using natural gas for heating and cooking will be paying an average of 25% more this winter than last year. And in some mid-western states the bills may increase by 40% or more. A report by the Citizen Labor Energy Coalition estimated last October that more than 300,000 households will have their gas heat terminated this winter. The reasons: an inability to pay their fuel bills and Ronald Reagan’s sharp reduction in critical fuel assistance funds.

It may be disorderly but it is also very profitable to gas producers, gas pipeline companies and, in the short run, your local gas distribution company. Why should they bargain for lower prices when the law allows these companies to pass along their higher costs from their suppliers to the final consumers?

Here is how this colossal consumer gouge is operating. Columbia Gas pipeline company recently refused to buy natural gas from producers at $3.50 per thousand cubic feet (tcf). (Note in 1973, the average price of natural gas was 29c per tcf.) Instead Columbia bought gas at $7.00 per tcf and passed the price along to consumers. Reagan’s government lets pipeline companies do that. So Columbia Gas has no incentive to shop around for cheaper gas; the more it pays, the more you pay and the more money Columbia Gas makes.

The pipeline companies defend themselves by saying they are contractually obligated to producers under a “take-or-pay” clause whereby they have to pay for the contracted gas even if they do not take it. Other contract provisions allow producers to charge their buyers the highest prices any of their other buyers are paying. These, and other similar inflationary terms, are just self-serving maneuvers between the fraternity of oil & gas companies to destroy the market momentum which would reduce prices when demand is down and supplies are up.

In the meantime, the people suffer. In Trenton, New Jersey, elderly families find they cannot pay over $100 in weekly heating costs. In the mid-west, unemployed workers and their families shiver in the winter, because their utility disconnected their gas supply. Hazardous heaters, around which families huddle, present increased fire hazards. All this in 1982 America:

Back in the warm White House, Ronald Reagan worries about his ideological consistency. He campaigned in 1980 on the promise that he would decontrol the price of natural gas. Now he finds that course of action to be a prospect replete with political disaster. It is not only the poor that is hurting; middle America has joined the exploited ranks with a rush.

No other consumer issue weighs heavier on the minds of Reagan’s closest political strategists than the price of natural gas. If they push Congress to decontrol the price of all natural gas production, they risk a veritable explosion of gas prices just in time for the 1984 elections. The millions of families who switched from oil to gas heat may consider themselves not a little put upon by the Republicans.

Some local gas companies (the distributors) do not want to see further price increases because they fear losing some of their customers and not selling more gas to the ones they keep. The absence of unity within the natural gas industry further complicates the choices available to the Reaganites.

The existing Natural Gas Policy Act provides for phasing out price controls on “new gas” (defined as gas from wells drilled after 1977) by the end of 1984, while keeping price controls on “old gas” (drilled before 1977). The prediction of close observers in Washington is that a deadlock will occur, with nothing being seriously pressed by the White House or passed by the Congress. The certainty is that no high government officials will make any visits to the homes of the people who are cold and poorer because their government hasn’t the courage or will to defend them.