Price responsiveness of commercial demand for natural gas in the US

Abstract

To estimate price responsiveness of commercial demand for natural gas in the US, we use five parametric specifications to conduct panel data analysis of a newly developed sample of 17,280 monthly observations for the lower 48 states in 1991–2020. We find that the US commercial natural gas demand is price inelastic, with statistically significant (p-value ≤ 0.05) static own-price elasticity estimates of −0.137 to −0.245, short-run −0.152 to −0.261 and long-run −0.281 to −0.463. These estimates vary by choice of a sample period, choice of a parametric specification, treatment of cross-section dependence, assumption of partial adjustment, and exclusion of fixed effects. Further, they vary by season and region and their size has been slowly declining over time. Finally, commercial natural gas shortage cost declines with the size of own-price elasticity estimates. The policy implications of these findings are: (a) price-induced conservation's likely limited effect on the US commercial natural gas demand justifies continuation of energy efficiency standards and demand-side-management programs for deep decarbonization; and (b) demand response programs such as real time pricing and reliability differentiation efficiently allocate limited supply of natural gas during a shortage among heterogenous end-users, thus reducing an economy's aggregate natural gas shortage cost.