Is Mark Perry correct about natural gas pricing and supply?

According to him falling natural gas pricing is proof that the market is working:

"Overall, the fact that the shale gas industry is "becoming a victim of its own success" is only a temporary "problem," and demonstrates that the price system and competitive market forces are working as expected: an abundant supply of natural gas leads to falling prices, which lowers the profits of producers, which then leads to automatic, self-correcting adjustments and responses as the natural gas market moves towards a new equilibrium.

Those adjustments might include: a) increased demand for natural gas as residential and commercial consumers shift from oil and electricity heat towards natural gas (see CD post), b) increased demand for natural gas by energy-intensive manufacturing companies that produce steel, plastics, chemicals, etc. c) increased demand for vehicles powered by natural gas, d) increased demand for natural gas for electricity generation, and e) reductions in the production of natural gas as it becomes less profitable and some producers shift towards shale oil.

All of those automatic adjustments (increased demand and decreased supply) will raise the price of natural gas over time, eliminate any economic losses currently being incurred by producers because of the low prices (and drive economic profits to zero in the long run), and the market will move towards a natural market-clearing equilibrium that eliminates the current "oversupply.""

What do you think?

One Response to “Is Mark Perry correct about natural gas pricing and supply?”

  1. ? Says:

    Instead of a case of "market failure" high fuel prices were the result of government intervention and market forces responding efficiently.

    Perry’s completely correct.