The institutional changes that produced the large decline in gas prices were a one-time event. Producers by now have eliminated the gross inefficiencies created by regulation and monopoly power. Further changes in the regulation of pipelines are possible and perhaps likely, but analysts envision nothing comparable to the transformation of pipeline companies from merchants of gas to gas transporters. Little room remains for shifting more of the transportation costs from electric generators to other natural gas users.

Future natural gas prices depend on the balance between the conflicting forces of resource exhaustion and technological progress. Over spans of time relevant to human beings, the physical supply of natural gas cannot be renewed. However, the availability of natural gas depends not on its total physical supply, but on the supply that developers can find and produce economically.

Generally, the process of finding and producing gas has not changed since the 1950s:⁸ Geologists identify promising formations; drillers sink wells; gas is produced from the wells that are successful. In its detail, however, the process has undergone changes that have greatly reduced the cost of locating and extracting gas. Powerful computers depict geological formations in three dimensions, identifying gas reservoirs in greater detail and with more certainly. Horizontal drilling-redirecting the shaft in a horizontal direction after it reaches the desired depth-has permitted economical production from small reservoirs that developers previously could have exploited only at high cost or not at all.

NATURAL GAS SUPPLY "Natural gas supply" can be an ambiguous term. It may simply connote the amount of natural gas delivered to end users. During 1995, the United States produced 19.0 trillion cubic feet (Tcf) of natural gas and imported another 2.6 Tcf, mostly from Canada. Losses during production and transportation totaled about 0.3 Tcf. End users received the remainder, about 21.3 Tcf. Natural gas supply also may refer to the reserves supporting production. Reserves are themselves classified in several different ways, based on the likelihood that they exist and the cost of producing them. Developers know of proven reserves with reasonable certainty and can exploit them economically using available technologies. At the end of 1995, proven reserves in the United States were 169 Tcf, equal to about nine years of domestic production at the current rate. This does not mean that the United States will run out of natural gas in nine years. Proven reserves form one part of economically recoverable resources: supplies that could be economically produced using currently available technology. Most economically recoverable resources have not been proven; many have not even been discovered. They therefore are subject to greater uncertainty than proven reserves. EIA estimates economically recoverable reserves in the United States at about 1200 Tcf. Economically recoverable reserves in turn are part of the ultimate resource base: the total amount of natural gas underlying the United States and its territorial waters. Estimates of the ultimate resource base cover a wide range, but the base probably is at least several times as large as the economically recoverable resources.

Changes such as these do not increase the physical supply of natural gas, but they do add to the supply that can be economically recovered. The Energy Information Administration (EIA), an agency of the U.S. Department of Energy, estimates that domestic economically recoverable natural gas resources in 1990 were 1105 trillion cubic feet (Tcf) using technology available in that year. Using technology projected to be available in 2015, the figure would have been 1491 Tcf.⁹ The difference of 386 Tcf would offset more than two-thirds of the 560 Tcf that analysts expect those resources to produce between 1990 and 2015.

In EIA's projections, this technological progress does not fully offset resource exhaustion. EIA expects natural gas prices to increase slowly by about 1.4% annually at the wellhead and 1.0% annually for electric generators.¹⁰ (See Figure 1.) Of course, prices could diverge from the projected path if further reductions in the cost of finding and producing gas prove either greater or smaller than EIA assumes. If the reductions exceed projections, gas prices again may rise less rapidly than expected or even decline. However, there is no prospect of a decline comparable to the one that occurred between 1980 and 1995.

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