An introduction to the economics of natural gas

Abstract

This paper is an up–to–date, but only moderately technical survey of the natural gas market. Supply, demand and pricing are discussed, and, in the light of the electricity deregulation experiment in California, where the expression “dangerous failure” has been repeatedly used to describe the extensive losses suffered by final consumers and utilities (or retailers), a modicum of attention is paid to the prospects for deregulating natural gas. Some microeconomics of the natural gas market is presented at a more elementary level than in my energy economics textbook (2000) or my book “The Political Economy of Natural Gas” (1987), and I make a studied attempt to avoid bringing the misleading Hotelling model (of exhaustible resource depletion) into the exposition. Finally, some comments on risk management with futures contracts are provided, and there is a brief mathematical appendix on futures, options and two–part pricing.