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Get Out Your Sweaters

The coming natural gas shock.

Dec 5, 2005, Vol. 11, No. 12 • By WILLIAM TUCKER
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The outcome was the Power Plant and Industrial Fuel Use Act of 1978, which banned natural gas in utility boilers. Gas was too precious a resource to be wasted on electricity. At the same time, Congress declined to extend natural gas price controls in the 1978 Natural Gas Policy Act, but did stretch them out for about a decade.

President Reagan did his best to accelerate price decontrol, and finally achieved it in 1987. Predictably, production rose steadily from 16.1 trillion cubic feet in 1986 to 19.6 in 2001--although it never regained the all-time peak of 21.7 in 1973. Eyeing this growing supply, environmentalists decided they had the answer to acid rain and global warming--substituting natural gas for coal.

Since 1992, more than 70 percent of the new utility boilers built in the United States have burned natural gas. The percentage of gas going to electricity has risen from 14 percent in 1988 (there were a few grandfathered plants) to 25 percent today. The use of gas for electricity has now surpassed residential consumption and is rapidly closing in on industrial use, which has declined 13 percent since 1997.

The rising demand for gas by power plants has decimated whole sectors of manufacturing, which use natural gas as a feedstock as well as a fuel. The fertilizer industry has been gutted, with more than half the manufacturing plants leaving the country. The American Chemistry Council estimates 100,000 job losses since 2000 due to increasing gas prices. Dow alone has shuttered 23 plants. Every kind of plastics manufacturing is affected. Simmons Bedding cannot obtain polyurethane for its mattresses. Goodyear has cut U.S. tire production 30 percent. Rescue workers in New Orleans couldn't get water to hurricane victims because of a shortage, not of water, but of water bottles. The 1.2 percent jump in consumer prices in September--the biggest increase in 25 years--is almost certainly the result of higher gas prices rampaging through American industry.

"But isn't this just the free market at work?" you might ask. "If burning gas for electricity is more efficient, shouldn't we just do it?"

There are several reasons this is not true. First, electric rates in most states are still regulated by public service commissions, which are readily passing the costs through to customers, especially because burning gas promotes "clean energy." Second, some states have become so enthralled with using gas to solve their pollution problems that they have tacked on all kinds of hidden subsidies, such as mandating that pipelines charge utilities their lowest rates for transmitting supplies.

Finally, market optimization presupposes a free substitution of other resources. The chemical and pharmaceutical industries have no substitute for gas feedstocks in their manufacturing processes. The utilities have one obvious substitute--nuclear power--but it is blocked for political reasons.

Remarkably, the nuclear industry has managed to make a vast contribution anyway--tripling generation from 251 billion to 788 billion kilowatt-hours over the last 25 years, increasing nuclear's share of electrical generation from 11 percent to 20 percent. All this has been accomplished by completing plants that were in the pipeline and improving the performance of existing reactors.

Still, a huge hole remains. It is hard to imagine this country having any kind of industrial future without a revival of nuclear power.

William Tucker is a contributing editor to the American Enterprise.