Market Forces Drive Natural Gas Innovations and Lower Costs for Consumers

Technology innovation driven by market forces has unlocked abundant domestic supplies of natural gas from unconventional geographic formations, resulting in enormous consumer benefits– namely, lower electricity prices and cleaner air. This natural gas success story shows how market forces drive innovation better than regulation, and should serve as an important lesson for policy makers tempted to intervene in the markets in response to transient market price signals.
 
The ability of markets to send clear price signals has been key to this transformation. As recently as a few years ago, U.S. natural gas prices were at record highs because of declining domestic production and growing demand for this clean-burning fuel. These prices led various stakeholders and policy makers to clamor for government intervention to lower consumer bills.
 
However, those price signals were an indicator to investors that the time was right to expand the use of new drilling techniques to recover gas locked up in shale rock deep underground. Innovation in the domestic gas industry revolutionized drilling techniques and created access to tremendous reserves of shale gas. 
 
U.S. natural gas reserves are now at their highest level since 1971, domestic natural gas production has grown 23 percent in the past five years, and shale gas now represents 20 percent of all U.S. gas production, according to the U.S. Federal Energy Regulatory Commission’s Winter 2010-2011 Energy Market Assessment. These abundant supplies of low-cost gas have provided power generators with a reliable and steady source of fuel, and have helped cut the cost of electricity in half over the past few years.
 
“Low gas prices are largely a result of the influx of new, low-cost shale gas,” found the assessment, and “forward electric prices range from 13 percent to 27 percent lower than winter forward prices at this time last year – these declines mostly follow forward natural gas prices.”
 
Shale gas has unlocked untold domestic natural gas reserves and lowered wholesale energy prices across the country. But if some stakeholders and policy makers had had their way, regulatory intervention in the marketplace would have prevented this innovation success story from happening.
 
A strong lesson exists in this story – when market forces are allowed to work, they drive innovation and create economic benefits for consumers. Regulatory intervention in the markets in response to transient price signals risks denying consumers the inevitable economic and environmental benefits they deserve.

Bill Massey | December 20, 2010