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High Prices Hurt Texas, Nation's Economy

High Prices Hurt Texas, Nation's Economy

Importing natural gas into Texas? Could the possibility even exist? Unless the state's oil patch has a revival in the next couple of years, a new study predicts that Texas soon will be consuming more gas than it produces, pumping up the possibility of transporting gas into the state that has long boasted its status as the energy capital of the country.

Dr. Bernard Weinstein and Dr. Terry L. Clower of the Center for Economic Development and Research at the University of North Texas found that rising natural gas prices may be having a beneficial short-term effect on producers' bottom lines, but overall, the higher prices will have a devastating effect on Texas' economy.

"The gas is here, but we can't keep up with the demand for it," said Weinstein. Twenty years ago, the high prices for natural gas were good for the economy, but Weinstein said times have changed. Now demand is greater than supply, and high prices are actually having a negative effect.

The supply and demand problem isn't just affecting Texas --- the researchers noted the negative impact on the nation's economy is already being seen in California and a few other states. That trend, said Weinstein, will continue without a boost in production everywhere.

"A few months ago, there was a lot of hand-wringing about the high gasoline prices," said Weinstein. "It was my view that we had more to worry about with natural gas prices, because while gasoline prices will go down in the fall, I think natural gas prices will stay high. They're twice what they were a year ago, and they could go even higher. That's a much bigger problem than what we pay at the pump for a few months of the year."

Weinstein published that conclusion in the study, "The Impact of Higher Natural Gas Prices on the Texas Economy." The figures are static, presuming that natural gas prices will not drop dramatically, and that the economy will remain at a constant level. Currently, the two things most affecting supply and demand are a "lack of capital, which most affects the smaller producers, and a loss of human infrastructure," said Weinstein. "There are no workers for the rigs."

For every $1 increase in the price of natural gas, the study found that the state's economic activity is reduced by at least $3.4 billion a year, translating into 34,000 lost jobs, and reduced salary, wage and income of $911 million.

The immediate impact, of course, is seen in higher energy bills, and across the country, utilities are requesting rate hikes to cover increased fuel costs. In Texas, more than 60% of the electric utility capacity uses natural gas, and the state's two largest utilities, Reliant Energy and TXU Corp., have both applied for rate increases related to the higher gas costs.

Take TXU's request for a rate hike. In three months' time --- between April and June ---TXU reported that its fuel costs rose to $4.59 billion from $869 million at the beginning of the year. The increased costs played havoc with TXU's second quarter earnings, too, when it reported that despite a 23% increase in revenues, its operating income was only up 9%.

All of this is related to the "fuel factor," which has remained unchanged in seven years. The natural gas portion of the formula presumes that TXU will pay $1.58/MMbtu. This year, TXU has paid about $3.11/MMbtu. To make up for the hike, TXU has applied for a 6% surcharge for six months, along with an overall 6.7% increase in rates. Reliant Energy also is requesting a rate increase to make up for its rising fuel costs.

"For Texas in particular, natural gas prices probably have more significant economic implications because they're not going to come down quickly," said Weinstein. "We're going to see more of this (rate hikes) until supply can catch up with demand."

The Weinstein-Clower study, completed in July, found that by its very nature the natural gas picture is more complicated --- strong U.S. economic growth has bolstered demand and affected prices. For example, natural gas industrial consumption, which takes up about 40% of U.S. demand --- has grown 4.5% in the past year alone, with the strong economy leading to more construction, and more natural gas-powered homes and businesses. Most electric generating capacity also has moved toward gas-fired turbines, both for regulated utilities and non-utility generators.

"Problems on the supply side have exacerbated the price spike," said the authors. "Drilling for gas plummeted in 1998 and early 1999 in the face of low prices. Between January 1998 and April 1999, the number of rotary rigs drilling for natural gas fell from 609 to 371; in Texas alone, the rig count dropped from 376 to 180. All told, the amount of new gas discovered in 1998 was equal to just 61% of that year's production."

Because of the supply side problems, producers now can't keep up with the rising gas demand. Total consumption was 21.4 Tcf in 1999 and it is expected to be near 22.5 Tcf this year, and jump another 3% next year.

"For Texas, higher gas prices bring both good news and bad news," said the study. "Because Texas ranks number one among the lower 48 states in on-shore gas production, higher prices generate added jobs, income and severance tax revenues. Each $1 increase in price, if sustained, boosts the state economy by almost $3 billion and creates a additional 8,800 jobs paying $415 million. At the same time, however, higher operating costs for Texas industries using gas as an input will decrease total state output by $4.29 billion and displace 21,000 jobs paying $758 million."

As a result, said Weinstein, the higher costs to Texas industry and households "more than offsets any gains."

Carolyn Davis, Houston

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