Saturday, March 24, 2007

Inelastic Supply

When the price of a commodity is volatile, it usually means that the supply is inelastic - a small change in quantity results in a large change in price. One of the things that makes supply more inelastic is the inability to store the commodity. In Arizona, that is exactly what has happened with natural gas.

Arizona is the only state in the Four Corners region with no natural-gas storage, leaving it open to potential shortages. In addition, consumers have no cost protection except the skill of gas traders in hedging the volatile natural-gas spot market.

On top of that, natural gas is increasingly used as a power source for electric generation, especially during the summer months.

With the closest storage facilities 700 miles away in west Texas and California's prohibition on natural-gas storage for out-of-state users...

Attempts to create a storage facility have failed to overcome various obstacles.

A promising salt cavern was discovered a decade ago in Glendale near Luke Air Force Base. El Paso Natural Gas purchased the land, but the state Legislature prohibited development of the site for natural-gas storage.

Likewise, another potential site was found near Kingman and purchased by Aguila Energy Co. five years ago. But that area in northwestern Arizona is too far away to help natural-gas needs in the Valley and was recently purchased by real estate development interests.

Still, local storage would help.

But the main advantage of local storage is having gas at hand when state consumers need it, said Damon Gross, an APS spokesman.

"That will ensure reliability and it can help against price volatility, but there's no guarantee," Gross said.

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