. "Appendix J Report of the Panel on DOE's Natural Gas Exploration and Production R&D Program." Prospective Evaluation of Applied Energy Research and Development at DOE (Phase Two). Washington, DC: The National Academies Press, 2007.
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Prospective Evaluation of Applied Energy Research and Development at DOE (Phase Two)
FIGURE J-8 Change in total surplus from the change in the supply curve. The DOE program is assumed to result in a decrease in the costs of production for Δ Q units of gas that were not economic to produce absent the DOE program. The cost of this marginal gas assuming no technical improvements from the program is shown by the initial supply curve to the right of the preprogram equilibrium price (P1). The reduction in costs of production for gas that was previously uneconomic results in a change in the supply curve (the “modified supply curve”), and the net change in total consumer and producer surplus that results is equal to the area of the dark gray triangle. For the benefits calculations, this area is approximated by the area of the light gray triangle, with the change in production costs, Δ Cp, taken from the panel’s assessment of the potential changes in costs attributable to DOE research.
foreign and hence their loss does not offset consumer gains. However, if a substantial share of gas consumed in the United States is imported (LNG), then the price elasticity assumption that underlies the DOE analysis is incorrect. According to the NEMS statistics, ERR (in the most optimistic case) adds 5 percent to the 2015 gas supply in the United States and results in a price decrease of at least 5 percent (a savings of $0.40 out of $7 to $8), implying a total price elasticity (supply plus demand) of, at most, 1. If LNG accounts for a substantial share of the market, then the price of gas is determined by world supply and demand. The contribution of the natural gas E&P program is then small relative to supply, and the market price will be much less sensitive to small changes in domestic supply. Thus, the savings to consumers, represented by a price change times the quantity of imported gas consumed, is, at best, trivial. As in the domestic case, the economic benefits of the program remain contingent on the value added by the additional gas produced by the program.