Record high gas prices and price volatility this year do not “foreshadow a pending long-term crisis in future natural gas supplies,” according to new report by Sanford University’s Energy Modeling Forum (EMF).

In its report, the EMF noted that the current uncertainty in the natural gas market is based on wild fluctuations in gas prices during the past three years. For example, the price of gas jumped from about $3/MMBtu in January 2000 to nearly $8/MMBtu a year later. By January 2002, the price had plunged to about $2, then tripled to more than $6 in January 2003. The price has since dropped to about $5.

But these fluctuations and spikes are not warning signs that the nation is running out of gas, the EMF said in its study, titled Natural Gas, Fuel Diversity and North American Energy Markets. Prices have spike in recent years because short-term “seasonal bursts” in consumption have outstripped the current capacity to deliver gas in the winter months. More gas storage facilities, higher storage inventories, longer-term contracts and greater use of financial instruments would “dampen future price spikes.”

The result would be greater price stability, which in turn would provide much-needed incentives for private investment in new resources and reduce the need for expensive government-subsidized projects.

“Industry will respond with more investment, and demand will respond to higher prices — provided that market participants are given the opportunity,” said Hillard Huntington, EMF’s executive director and co-author of the study.

The EMF calculates that gas consumption could grow 0.8-2.8%/year between 2002 and 2020 depending on market conditions. The projected price received by producers in 2020 could be as low as 58% of today’s levels or as high as 118% depending on the model and the scenario. Higher prices will result if oil prices are higher, drilling productivity is lower or economic growth is higher. Lower prices would result if oil prices are lower or the cost of new frontier gas is more competitive.

The industry and the country should avoid creating a situation in which power plants shift strongly in favor of natural gas for environmental reasons while at the same time regulations, land use rules and siting concerns restrict gas supply development, the EMF said in its report.

The Energy Modeling Forum was established in the Stanford School of Engineering in 1976 to help improve the use of modeling for understanding complicated energy and environmental public policy problems. A list of EMF sponsors is included in the report. For a copy of the report go to https://www.stanford.edu/group/EMF/publications/index.htm.

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