tightness sometime earlier, perhaps as early as 1983. Partly, this will occur because of the political decisions of individual OPEC countries against expansion of production facilities, and partly, it will result from growth in economic activity and resultant growth in energy demand in the rest of the world. At that point, Jensen Associates anticipates a discontinuity in the long-run trend of oil prices. (See Figure I-8.) Beginning in about 1983, the rise in real crude oil prices may be expected to accelerate to perhaps 10 percent per year for the remainder of the decade. In our analytical work, we place a limit to real oil price increases starting in 1990. The limit is purely arbitrary, reflecting more an unwillingness on our part to believe that oil prices can continue to increase at compound rates of 10 percent than any specific foreseeable limit to the rises.

Crude oil prices paid by refiners in the U.S. are, of course, only partially influenced by international markets. Most domestic crude oil is price-controlled at the wellhead, and thus the weighted average cost of crude oil to refiners is somewhat below the price of imported crude. Imported crude, itself, is a mixture of various crude qualities from a variety of sources. Domestic crude oil price controls will be gradually relaxed from June 1979 through October 1981, when they will be completely removed. As for the imported crude oil mix, this is expected to change over time to include a larger fraction of North Sea and Mexican crudes. This will reduce the average transportation distance, but we believe that the benefits of this locational advantage will be mainly captured by the producers. Thus, the weighted average cost of imported crude is expected to increase at about the same rates as Arabian Light marker crude. From projections of crude oil prices, an estimate of delivered industrial oil prices, such as were used in Figures I-1 to I-4, requires separate judgments about trends in tanker rates, refinery margins for both No. 2 and No. 6 oil, and product transportation and distribution margins. These factors are reflected in our final figures.

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II. U.S. NATURAL GAS DEMANDS

The

Since natural gas curtailments began affecting the patterns of natural gas consumption in the early 1970s, the markets for natural gas have changed substantially. The necessity of coping with a natural gas shortage dominated the first half of this decade to such a degree that concern with the degree of demand for natural gas became secondary. rapid price increases during this period for all fuels created an increased awareness among consumers of the need to find ways of using energy more efficiently. In addition, the threat of gas curtailments forced many industrial users of gas to install alternate fuel capability and made the industrial market for natural gas increasingly pricesensitive. Since 1974, a body of Federal and state legislation has been passed which restricts the future use of natural gas in selected applications. All of these factors are expected to affect substantially the demands for natural gas in the future. The following analysis considers the implications of these developments in the residential/commercial, industrial and electric power sectors.

RESIDENTIAL AND COMMERCIAL

The natural gas shortage did not affect the existing residential and commercial markets as severely as it affected the industrial and power generation sectors. Nonetheless, actual residential sales declined between 1972 and 1977. Total residential demand in 1977, when corrected for weather variations, was actually 2.9 percent below sales in 1972.

The long-term changes in demand between 1972 and 1977 arose from two counteracting forces-customer growth and conservation. Potential customer growth was inhibited by the advent of pipeline curtailments which resulted in restrictions being imposed on new customer attachments in most regions of the country. In many cases, the moratoriums applied only to new spaceheating customers. In the more adversely affected areas-particularly the East-state and utility company policies precluded any 33

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new customer attachments.

The effect of the partial and full restrictions,

however, was often the same. If utility company policy required the customer to absorb either the cost of main extension, service piping, or both, the operating cost advanta ?tural gas were frequently eroded to render gas unattractive

sufficiently by the higher installatio

for non-spaceheating applications. Although some growth in demand from new customers did occur between 1972 and 1977 (261 bcf or 5 percent), the rate was significantly below the utility industry experience prior to the supply shortage. Conservation, on the other hand, acted to reduc the impact of this growth by 411 bcf. The cumulative effects of both customer growth and conservation are shown in Tables II-1 and II-2.

It is apparent that conservation has played the primary role in reducing residential demands. Since 1972, the U.S. average reduction in per meter normalized consumption has been 7.9 percent (through 1977), while some regions have experienced conservation levels that approach 17 percent.

Several factors account for this rise in conservation effort and decline in demand. Certainly, public awareness of the potential for conservation has fostered changes in individual consumption patterns. Secondly, exhortations by public officials to conserve energy has likely prompted some patriotic response in reduced demand. The most significant influence, however, has been the upward movement in gas prices. Between 1972 and 1977, residential gas prices rose 96 percent while the consumer price index increased only 45 percent indicating a real gas price (adjusted for general inflation) increase of more than 35 percent. (See Table II-3.) The typical consumer response to this rise in prices has been a reduction in demand.

Three methods have been employed to reduce gas consumption--comfort changes such as thermostat setback, structural changes such as insulating attics, and fuel switching such as replacing a gas range with an electric range.

Comfort changes are simple, immediate responses to higher gas costs but their permanence has not yet been determined. Since consumer behavior is affected more by the total utility bill than by cost per mcf, factors such as a very warm or very cold winter will affect the magnitude of any

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