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Over the past ten years, the natural gas industry has engaged in an open debate concerning the existence of a natural gas "bubble". The definition of the gas "bubble" can be different and confusing to most producer and consumer groups. Major oil companies, independent producers, pipelines, gas marketers, industrial users, electric utilities and local distribution companies (LDCS) must collectively understand the present supply and demand dynamics of the natural gas industry. While certain industry. groups proclaim a gas supply "bubble", others are concerned about the end of the deliverability "bubble". Even though the domestic resource base of natural gas is enormous, the proved reserves represent only a very small fraction of the resource base. Moreover, the proved reserves of natural gas have been declining since 1970. In 1970, the proved natural gas reserves were 290.7 trillion cubic feet and at year end 1991 they had declined to 167.1 trillion cubic feet. Natural gas consumption peaked in 1973 at 21.7 trillion cubic feet and declined to 163 trillion cubic feet by 1986. The decline in gas consumption was a response to various regulatory actions and economic events. This decline in consumption was the primary cause of the deliverability "bubble". Since 1986, natural gas consumption has shown a steady increase. There exists a considerable body of evidence which can be interpreted to show that a deliverability shortfall in natural gas supply is imminent and the "bubble" will soon burst. Introduction A considerable amount of publicity has been generated by supply studies, including a soon to be published report from the National Petroleum Council which concludes that the United States has a resource base of 1300 trillion cubic feet of natural gas. The general public, including government policy makers, might interpret this conclusion as representing a nearly limitless supply of natural gas. Nothing could be further from the truth. This volume of resource gas includes both proved reserves and unproved quantities of gas. The unproved category includes quantities of gas that are undiscovered, unidentified, except in the broadest of terms, and currently uneconomic to produce. Proved reserves, on the other hand, are quantities of gas that have been discovered, identified and can be produced and marketed at current prices and costs. With this background, is it any wonder there is so much confusion surrounding the much-publicized and long- lasting "bubble"? The term "bubble" has been used to describe the oversupply of natural gas reserves and excess production capacity. The analysis of statistical data in conjunction with regulatory reaction to structural changes can help identify the causes of this "bubble" and forecast its demise. Regulatory changes over the past twenty years have had a profound effect on gas reserves, gas production and gas demand. Before the Natural Gas Policy Act (NGPA) was passed by Congress in 1978, regulators encouraged the industry to create excess deliverability and long-term supplies. Passage of the NGPA spurred a drilling frenzy focused mostly on deep, high cost gas which commanded a higher price. In 1978 Congress passed the Fuel Use Act which prohibited the use of natural gas as a boiler fuel in newly constructed facilities. These events coupled with an economic recession resulted in a decline in demand for natural gas creating an oversupply of gas reserves with excess delivery capacity. P. 63^

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