Effects of Inflation - the '77 Natural Gas shortage. What would this mean to us now?

 

This is the first post I am putting up to explain and show what the impact was when the strong, unrelenting inflation hit the USA when we went off the gold standard. Now, this was not the first time we had high inflation post WWII.  But this was for sure the start of a New World for Americans. 

We have to ask ourselves "what about now? What are we not expecting to happen to us?"

The title is a little misleading..but people at the time knew they were talking about natural gas.

Reading this article in Newsweek you would think...well, stuff just happens.  However, this is the story of government regulations with no thought of the Unintended Consequences. A story of price regulation gone wrong in the New World of Choking Inflation.  And no one was looking. 

The adage "fixed prices create scarcity" was at play.

The crisis has been building for years, the result of government complacency and a clash between an industry that wanted to deregulate gas prices and a Congress that refused to do so.... Natural-gas companies have long contended that an unduly severe winter weather could create perilous shortages. Since 1967, America's natural-gas reserves have decreased more than 25 per cent, and the gas companies have maintained that stringent price controls have denied them the profits necessary to finance new exploration and drilling. Opponents of deregulation, fearful of raising energy prices in the midst of a recession, charged that the industry was crying wolf. 

That debate continued last week, with some still charging that the gas companies were holding back supplies to prod Congress into ending controls.

If you want to understand the complete history of government regulations, you can visit this site.  Below, I extracted the info dealing with the problem at that time from that website. I bolded the important parts and added some info for clarity.

The Effects of Wellhead Price Controls 1954-1978

All three of these systems of price control discussed above [you can read that history at the  link - JG] had disastrous effects on the natural gas market in the United States. The artificially low price ceilings that had been set since 1954 had a number of outcomes in the market, coming to bear in the late 60s and 70s. Because the set rates for natural gas were below the market value of that gas, demand surged. The low prices of natural gas, as set by the FPC, meant that consumers were receiving good value for their money. This combined with the oil price surges experienced during the OPEC crisis in the 70s made natural gas an even more attractive fuel.

However, at the same time, there was little incentive for natural gas producers to devote the money required to explore for and produce new natural gas reserves. The selling price for natural gas was so low, it simply wasn’t worth it for the producers. Producers also saw little incentive to search for new reserves. While the price at which they could sell interstate gas was fixed, the finding and development costs for establishing new reserves was as variable and unpredictable as ever. Producers saw little reason to engage in the exploration of new reserves that would cost more to find than they could be sold for under FPC wellhead price control. [the Federal Power Commission - the FPC, which had been created in 1920 with the passage of the Federal Water Power Act - JG]

However, the FPC only regulated producer wellhead prices for natural gas destined for the interstate market, leaving natural gas sales within the intrastate market relatively free of regulation. So while demand was surging nationwide, economic incentives did not exist for producers to ship their gas across state lines. They could sell it at a much higher price to intrastate bidders. In 1965, a third of the nations proved reserves were earmarked for intrastate consumers; by 1975, almost half of the proved reserves were committed to intrastate consumers.

This resulted in natural gas reaching consumers in the producing states, while the consuming states were experiencing natural gas supply shortages. In fact, in 1976 and 1977, many schools and factories in the Midwest were forced to close, due to a shortage of natural gas to run their facilities. Meanwhile, in the producing states, virtually no shortage was felt, due to the thriving intrastate market satisfying natural gas demand in these states. This led to certain ‘curtailment’ policies, advocated by the FPC and state utility regulators. These policies essentially set a schedule of priority, directing distributors and transporters to curtail supplies to certain customers who were deemed ‘low priority’. However, these policies resulted in numerous litigation suits and FPC proceedings that turned out to be extremely complicated and time consuming. Realizing that something must be done at the federal level to reduce the strain of these supply shortages and demand surges, Congress enacted the Natural Gas Policy Act in 1978.

As the fight among the net producers went back and forth, the people in states like Texas sported bumper sticks showing their general animosity: 

"Let the bastards freeze in the dark” (or “Let the Yankee bastards freeze in the dark” or “Let them freeze in the dark") and “Drive 80 mph and freeze a Yankee” (or “Drive 90 mph and freeze a Yankee” or “Drive fast and freeze a Yankee") were bumper stickers that were popular in Texas during the 1973-74 energy crisis.

The bumper sticker “Let them freeze in the dark” appears to have started by a Wyoming company in February 1973. Energy prices were rising, but toughened environmental laws prevented finding more energy sources. The “them” were the environmentalists.

Texans had other reasons (besides environmental restrictions on energy) for “freezing Yankees” in 1973-74. Federal regulations had required supplying Northeast customers with oil and natural gas at regulated prices. Also, Northeast politicians had suggested that Texans should have conserved energy during this out-of-state energy giveaway. The “Drive 80 mph and freeze a Yankee” bumper stickers were popular in Houston at this time.

The dates for this show these bumper stickers were popular in the early 1970s, but I suspect they were either still affixed to those bumpers, or they bought more. 

South Carolina, which was a predominantly Democrat state at the time, attempted to do its part.  The University of South Carolina, where I was attending, decided to switch their power generating plants from natural gas to fuel oil (dual fuel boilers are very common).

I still remember a friend of mine, while I was walking to my next class, came running up to me yelling "Hey, guess what!! The University is shutting down!  We ran out of fuel oil!!"

Yes.  The university shut down early for the Christmas holidays and opened back up in late January (if my memory is correct).