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A wellhead pricing policy for natural gas is an important element of U.S. energy policy. In order to raise the wellhead prices of natural gas to achieve a balance between supply and demand in 1985, the Natural Gas Policy Act of 1978 specified gradual price increases for various categories of gas, based on a projected price of oil that is considerably lower than current oil prices. This price disparity has introduced more inefficiency in the natural gas market and could, depending on oil prices and contract provisions, lead to a sharp increase in average wellhead prices in 1985. Consequently, alternative natural gas pricing policies have been Suggested to facilitate the transition to a deregulated market.

At the request of the Senate Budget Committee, this paper analyzes the macroeconomic and budgetary effects of alternative natural gas wellhead pricing policies. In keeping with CBO's mandate to provide objective analysis, the report makes no recommendations.

This paper was written by Timothy Considine of CBO's Natural Resources and Commerce Division, under the supervision of David L. Bodde and Everett M. Ehrlich. Research assistance was provided by Kristi Bleyer, Emily Fox, Paul Higgins, and Timothy McBride. The author wishes to thank Robert Dennis, Frederick Ribe, Peter Taylor, and Stephen Zeller of CBO's Fiscal Analysis Division; Kathleen Gramp, Anne Hoffman, and Kathy Ruffing of CBO's Budget Analysis Division; and Valerie Amerkhail and James Nason of CBO's Tax Analysis Division for their helpful comments. Patricia H. Johnston edited the manuscript, and Deborah L. Dove typed the many drafts.
 

Alice M. Rivlin
Director
January 1983
 
 

SUMMARY

CHAPTER I. INTRODUCTION

CHAPTER II. BUDGETARY EFFECTS OF NATURAL GAS PRICE DECONTROL

• Economic Adjustment Process Under Higher Natural Gas Prices
• Methodology
• Assumptions
• The NGPA, Policy Options, and Natural Gas Prices
• Budgetary Effects of the Policy Options

CHAPTER III. SENSITIVITY OF DECONTROL EFFECTS TO OIL PRICES

• High and Low Oil and Gas Prices
• Budgetary Effects of Gas Decontrol Under Alternative Price Scenarios

CHAPTER IV. SENSITIVITY OF DECONTROL EFFECTS TO FISCAL AND MONETARY POLICY ASSUMPTIONS

• Formulation of the Alternative Fiscal and Monetary Policy Assumptions
• Complete Decontrol in 1984
• Partial Decontrol in 1984

APPENDIX A. NATURAL GAS REGULATORY HISTORY AND CONTRACT PROVISIONS

APPENDIX B. MEASURING THE MACROECONOMIC AND BUDGETARY ADJUSTMENTS TO GAS PRICES
 

TABLES
1.	OVERVIEW OF THE NATURAL GAS POLICY ACT OF 1978
2.	NATURAL GAS PRICE PROJECTIONS UNDER ALTERNATIVE GAS PRICING POLICY OPTIONS
3.	MACROECONOMIC AND ENERGY DEMAND EFFECTS OF COMPLETE NATURAL GAS DECONTROL IN 1984 UNDER BASE ASSUMPTIONS; CHANGES FROM THE BASE CASE
4.	NET BUDGETARY EFFECTS OF COMPLETE NATURAL GAS DECONTROL; CHANGES FROM THE CBO BASELINE
5.	MACROECONOMIC AND ENERGY DEMAND EFFECTS OF PARTIAL NATURAL GAS DECONTROL IN 1984 UNDER BASE ASSUMPTIONS; CHANGES FROM THE BASE CASE
6.	NET BUDGETARY EFFECTS OF PARTIAL NATURAL GAS DECONTROL; CHANGES FROM THE CBO BASELINE
7.	MACROECONOMIC AND ENERGY DEMAND EFFECTS OF ADMINISTRATIVE DECONTROL IN 1983 UNDER BASE ASSUMPTIONS; CHANGES FROM THE BASE CASE
8.	NET BUDGETARY EFFECTS OF ADMINISTRATIVE NATURAL GAS DECONTROL; CHANGES FROM THE CBO BASELINE
9.	ALTERNATIVE DOMESTIC WELLHEAD OIL PRICE ASSUMPTIONS
10.	CONSTRUCTION OF AVERAGE WELLHEAD NATURAL GAS PRICES IN 1985 UNDER NGPA AND ALTERNATIVE OIL PRICE ASSUMPTIONS
11.	SCENARIOS FOR AVERAGE WELLHEAD NATURAL GAS PRICES UNDER COMPLETE DECONTROL IN 1984
12.	SCENARIOS FOR WELLHEAD NATURAL GAS PRICES UNDER PARTIAL DECONTROL IN 1984
13.	NET BUDGETARY EFFECTS OF THE HIGH OIL PRICE SCENARIO UNDER NGPA; CHANGES FROM THE CBO BASELINE
14.	NET BUDGETARY EFFECTS ON THE LOW OIL PRICE SCENARIO UNDER NGPA; CHANGES FROM THE CBO BASELINE
15.	SENSITIVITY OF OUTPUT, INFLATION, NATURAL GAS DEMAND, AND NET BUDGETARY EFFECT TO OIL PRICE CHANGES UNDER COMPLETE DECONTROL IN 1984; CHANGES FROM THE NGPA BASE CASE
16.	SENSITIVITY OF OUTPUT, INFLATION, NATURAL GAS DEMAND, AND NET BUDGETARY EFFECT TO OIL PRICE CHANGES UNDER PARTIAL DECONTROL IN 1984; CHANGES FROM THE NGPA BASE CASE
17.	INTEREST RATE CHANGES FOR THREE DECONTROL OPTIONS, ASSUMING A NONACCOMMODATIVE MONETARY POLICY; CHANGES FROM THE ORIGINAL NGPA BASE CASE
18.	MACROECONOMIC AND ENERGY DEMAND EFFECTS OF COMPLETE NATURAL GAS DECONTROL IN 1984, ASSUMING A NONACCOMMODATIVE MONETARY POLICY AND NO INCREASE IN FEDERAL DISCRETIONARY SPENDING; CHANGES FROM THE NEW NGPA BASE CASE
19.	NET BUDGETARY EFFECTS OF COMPLETE NATURAL GAS DECONTROL IN 1984, ASSUMING A NONACCOMMODATIVE MONETARY POLICY AND GOVERNMENT DISCRETIONARY SPENDING UNADJUSTED FOR INFLATION; CHANGES FROM THE NEW NGPA BASE CASE
20.	MACROECONOMIC AND ENERGY DEMAND EFFECTS OF COMPLETE NATURAL GAS DECONTROL IN 1984, ASSUMING A NONACCOMMODATIVE MONETARY POLICY AND FEDERAL DISCRETIONARY SPENDING UNADJUSTED FOR INFLATION; CHANGES FROM THE NEW NGPA BASE CASE
21.	NET BUDGETARY EFFECTS OF PARTIAL NATURAL GAS DECONTROL IN 1984, ASSUMING A NONACCOMMODATIVE MONETARY POLICY AND FEDERAL DISCRETIONARY SPENDING UNADJUSTED FOR INFLATION; CHANGES FROM THE NEW NGPA BASE CASE

 

In the Natural Gas Policy Act (NGPA) of 1978, the Congress sought to decontrol gradually the wellhead price of most natural gas, thereby providing incentives for a more efficient gas industry. But events that were not envisioned by the framers of the NGPA--the 1979-1980 oil price shock and contract provisions peculiar to the gas industry--have disrupted the smooth transition to decontrol contemplated in the NGPA. These conditions have led many in the Congress to reconsider the nation's long-term pricing policy for natural gas.

While the decontrol of natural gas is a major issue in formulating U.S. energy policy, this report examines natural gas pricing policies from the perspective of the federal budget. The higher gas prices resulting from decontrol would have significant macroeconomic repercussions. In turn, these economic responses would ultimately change budgetary outlays and, especially, revenues.

This report discusses three approaches to wellhead price decontrol, including complete decontrol on January 1, 1984. Assuming moderate increases in the price of oil between 1982 and 1985 and an accommodative set of fiscal and monetary policies, the resulting budgetary effects would be small under any alternative, both in comparison with the federal deficit and in comparison with the other policy instruments that affect the budget. The complete decontrol of all natural gas on January 1, 1984, for example, would reduce the fiscal year 1984 federal deficit by $3.6 billion when compared to the budget with the NGPA assumed to remain in force. The cumulative effect over fiscal years 1984-1987 would be a $5.0 billion reduction in the deficit.

If oil prices rose to a higher level, the fiscal year 1984 deficit would be reduced by $7.0 billion under complete decontrol. Under a low oil price scenario, complete decontrol would reduce the deficit by only $1.4 billion. Under complete decontrol, a nonaccommodative monetary policy combined with a fiscal policy that restricted federal discretionary spending would reduce the deficit by $4.6 billion in fiscal year 1984. These restrictive policy assumptions magnify the output losses under decontrol and lead to a $1.8 billion increase in the 1985 deficit.

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