Abstract
This paper analyses the effects of natural gas deregulation in an optimal control framework. The Hotelling type model studies the effects of deregulation on the behaviour of a profit-maximizing competitive producer who explores and produces both new and old gas. We concentrate on the interdependent nature of the extraction and exploration decisions and compute optimal time paths for explanatory effort, extraction and prices. In particular, the natural gas market after January 1985 is analysed. The status quo regime is a regime of partial deregulation with new gas completely deregulated and old gas under price controls. The price of old gas is exogeneously determined by the regulating authority, but the price of new gas is determined endogeneously through the market demand equation. Various schemes of deregulation which fall between the completely unregulated free market case and the status quo case are analyzed and compared to these limiting cases. Losses in consumer surplus and producer surplus are calculated to choose a deregulation scheme that would be least costly to society.
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