A Note on Deregulation of Natural Gas Prices

THE PURPOSE of this paper is to bring to the attention of a larger, nonspecialized audience a possible change in policy that may have wide and costly ramifications: deregulation of natural gas prices. There is some value in making even rough "guesstimates" of the economic implications of price deregulation because of the general bias that both economists and businessmen have in favor of deregulation. I It is easy to support that bias. Anyone who looks into gas price regulation even superficially will find a host of "horror stories" concerning resource allocation and seemingly arbitrary conferment of benefits. Gas prices at the wellhead vary from under $0.50 per thousand cubic feet to over $8.00. Distribution companies that have access to much lowprice gas can afford to pay great premiums for extra gas, which they then mix with the low-price gas and sell to the ultimate users (a practice known as rolled-in pricing). Deregulation of gas prices would eventually eliminate these allocational and distributional distortions, at least after existing contracts have expired. But deregulation would have other consequences that, when taken altogether, might well be far worse than the distortions. The magnitude of these effects-redistribution from consumers to producers, macroeconomic impacts, and increased dependence on oil imports, each of which is discussed below in turn-depends greatly on the extent to which the existing price regulations have suppressed gas prices. It is widely assumed that gas competes directly with oil, especially residual