The development of residential natural gas markets in The East North Central U.S.A. since 1940

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Vol.

13, No. 5, pp. 393-400, 1988 in Great Britain. All rights reserved

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0360-5442/88 $3.00 + 0.00 0 1988 Pergamon Press plc

THE DEVELOPMENT OF RESIDENTIAL NATURAL MARKETS IN THE EAST NORTH CENTRAL U.S.A. SINCE 1940

GAS

JOHN H. HERBERTt U.S. Department

of Energy, Washington. DC 20585, U.S.A (Received 9 December

1987)

Abstract-The growth in residential natural gas markets after 1940 in the East North Central Census division of the U.S.A. is discussed in this article. Statistics from several sources are combined to indicate quantitatively the effect and sources of this great economic growth story, which transformed households and greatly improved the economic welfare of household members in this region.

INTRODUCTION

The East North Central (ENC) United States census division states of Illinois, Ohio, Indiana, Michigan, and Wisconsin make up the largest market for natural gas sales (NGS) to households in the United States today. The development of this market is a major economic growth story of the twentieth century. Between 1943 and 1972, when personal income in constant dollars (INC) doubled, NGS in the ENC increased 1Zfold. The growth of this market significantly transformed both the environment and the economics of households in ENC. Consumers moved from direct and indirect dependency on coal/coke (CC) and wood (WD) to a dependency on natural gas (NG) for the energy required to operate households. While other studies have described how NG and electricity (EL) changed the economic welfare of household members within specific cities outside the ENC’,* and for earlier time periods, 3T4this is the first study in which this important region and the period after 1940 are examined. Data from several sources are brought together to present a statistical summary of the magnitude, effects and probable causes of growth in NGS to households in ENC since 1940.

FUEL

USAGE

IN HOUSING

UNITS

IN 1940

As indicated in Table 1 approx. 90% of households in ENC directly obtained space heating energy from CC or WD in 1940.5 Households using gas (G) for space heating were also indirectly dependent on CC since some of this gas was manufactured from CC. The reliance of households on CC had several disadvantages. Furnaces, fireplaces, stoves, and other appliances had to be regularly fed and otherwise maintained. Ash had to be removed. Soot soiled clothes. The process of storing CC in bins and transporting it to the furnace or boiler greatly limited the use of basements for other purposes. Both smog from chimneys and particulates from CC and WD furnaces settled in air outside and within households. A G plant in the neighborhood of the household also produced noxious fumes and other externalities as byproducts from manufactured G (MG). Labor required to support this costly dependency was available during the 1930s when unemployment outside the household was high. This situation changed with the onset of the Second World War. Men were drafted into various services and many women found jobs in factories in ENC at relatively high wages to support the war effort. After being stagnant or declining for a decade, per-capita income (INC) doubled between 1940 and 1945.6 The change tAddress for correspondence:

2929 Rosemary Lane, Falls Church, VA 22042, U.S.A 393

ESY13:s.11

394

JOHN H. HERBERT

Table

1. Primary

State Illinois

heating

Coal or Coke 1,858.6

fuels in households

wood 76.6

in the East North Ref. 5.

Central

region

in 1940 in lOOOs, source:

Gas 47.9

89.9

1

1

1.7

1.7

1

7.2

1 1.1

in the economic condition of households increased the opportunity cost associated with continuing to employ a CC or WD using appliance for the production of household services. As work time outside the households increased, leisure time became scarcer. Hence, the value of leisure time increased. As a consequence, the willingness to make purchases of labor-saving devices for the household, such as NG space heaters, stoves, and water heaters, increased. The statistics reported in Table 2 indicate that G was a significant source of energy for cooking in 1940, especially in Illinois and Ohio. Much of this G, especially in Illinois, was MG. Thus, many households were hooked up to gas lines and one of the initial and additional costs of using NG had already been incurred by many households. This development increased the demand for NG space heaters when NG became available. WD and CC were still used as sources of energy for cooking in 1940. In Indiana and Wisconsin, the combined percentage of housing units using CC or WD approximately equalled the G share. Households dependent on WD for their energy were a vestige of the 19th century’ and were soon to disappear almost totally. Water heaters, as they are known today, were not abundant. Frequently, the source of hot water was a large pan on top of a stove or a WD furnace. Water heaters using gas were much easier to manufacture and to use than water heaters using WD or CC. The expense of water heaters, however, was relatively easy to forego during the depression. As NG water heaters became more readily available and INC increased from depression levels during and after the war years, an increasing number of water heaters were purchased. Since water heaters are the second largest user of G in the household after space heating, growth in the use of such appliances was important to the growth in NGS. The statistics in Table 3 indicate that the principal markets for G in the ENC were the densely populated urban areas. Approximately 50% of the G customers in Michigan resided in the Detroit area, which accounted for 43% of the occupied housing units in the state. The G market was least dispersed in Wisconsin. Although the Milwaukee area contained only 26% of the housing units in Wisconsin, it accounted for 63% of the space-heated housing units. This lack of dispersion is understandable, given the relatively primitive state of pipeline and NG underground storage technologies, the lack of capital available for improving such technologies during the 1930s and the cost advantage of serving households in densely populated areas. Between 1940 and 1952, but especially after 1945, the described characteristics of Table

2. Primary

State

cooking

fuels

in households in the East lOOOs, source: Ref. 5. Kerosine/ Gasoline 159.4

Coal Coke 385.6

North

Central

Electricity 76.8

region

in 1940 in

Illinois

Gas 1,426.7

&cd 100.9

Ohio

1,281.7

78.2

135.1

268.4

105.0

4.1

4.2

Other 7.4

NDne 8.2

Michigan

769.9

182.8

131.2

108.8

181.1

2.2

3.3

Indiana

405.6

107.7

168.7

199.1

60.6

4.2

2.6

Wisconsin

370.7

262.1

78.5

36.3

65.7

3.4

1.9

Development

of residential natural gas markets

395

Table 3. The number of gas space heated housing units and housing units in 1000s in a state and in the principal place in the state, source: Ref. 5. IndianStatistic Indiana Gas Units 8.9 Housing Ilnits 961.5 X of Gas Units 0.92%

awlis

CleveMichiqan Detroit Illinois Chicago

1.4

52.3

25.6

130.1

1,396.0

594.7

2,192.7

1.04%

3.75%

4.31%

2.91%

47.9

cxlio

35.3

138.7

1,284.3 1,897.E 2.75%

7.3%

Iand 46.0

Wisconsin 3.8

Milwaukee 2.4

335.9

827.2

215.7

13.69%

0.46%

1.12%

households, of the economy, and of the G industry were to change. This period, during which improvements in pipeline and NG storage technologies occurred, set the stage for the great growth period between 1952 and 1972 when NGS to residential customers were to increase almost 4-fold to 1.6 x 1015B.t.u.,‘,’ their highest level ever.

CHANGES

BETWEEN

1945 AND

1952

Changes in price and in income influence economic choices. In comparing the price of CC and NG, it is necessary to account for the greater efficiency of NG in producing useful heat for the household. Prices, adjusted to account for these differences in efficiencies, are presented in Table 4 for selected cities”’ for which data are available. In 1941, G was relatively expensive in Chicago and in Detroit. The price of coal, however, rose despite price controls during the war years. The price of G, meanwhile, remained constant or declined. By 1947, the price of G was cheaper than coal in all four cities listed in Table 4. The savings from using G instead of the principal alternative fuels rose consistently after 1947. Consequently, the level of demand for G increased as the price of substitute fuels increased. The quantity of G demanded also increased as the real price of G declined, as it did consistently between 1941 and 1952. Based on the history of price movements, the price of coal would be expected to rise further as labor unions continued to obtain wage increases for miners. Thus, consumers who switched from CC to G might expect to reduce energy expenditures from using G instead of CC. Such expectations would tend to raise the level of demand for G. The baby boom after the Second World War increased the value of time within the household and, accordingly, increased the opportunity cost of maintaining a CC or WD furnace. More time and a cleaner household environment could be made available for the raising of children by the addition of G furnaces and other G appliances. Despite a 6% reduction in INC, deflated by the Consumer Price Index-all items,” as reported in Table 5, between 1945 and 1952, NGS continued to increase at a high rate. This rate implies that not only were many new homes equipped with the capability of using NG but many existing homes were converted to NG. The increased demand in Ohio alone between Table 4. Price of fuels, adjusted for differences in B.t.u. content, in major cities in the East North Central region in cents per IO6B.t.u., source: Ref. 10. City

Fuel Rituminous Coal

Chicago

Oil

Year 1945 77.5

1952 132.3

NA

Fp\

G=.S

87.5

87.5

87.5

Cincinnati

Bituminous Coal Gas

63.1 62.5

70.2 62.5

123.5 78.1

Cleveland

Bituminous Coal Gas

72.5 62.5

80.6 62.5

139.2 65.5

Bituminous Coal Fuel Oil

72.5 WA

81.9 PiA

142.3 177.5

Gas

82.3

78.0

Qtroit

Fuel

1941 69.8

186.8

99.5

396

JOHN

Table 5.

H. HERBERT

personal income in nominal and in real dollars in the East North Central region, source: Ref.6.

Per-capita

Statistic

Year 1945 1,333

kminal Ibllars PercentageChange Real bllars PercentageChange CPI (1967=100) PercentageChanqe

Table 6. Residential sales of gas in East North Central region in 10” B.t.u., source: Ref. 9. State

I Illinois Indiana Michigan Chio Wisconsin

these years, as reported 1945.

NaturalGas 1945 1 1952

I

6.33 5.14 32.60 86.91 0.00

1 ManufacturedGas 1 I 1945 I 1952 I I I I

54.06 19.34 103.38 224.35 20.41

1.67 4.35 0.85 0.35 6.31

Mixed Gas 1945 I 1952

1

0.05 4.10 0.09 0.47 0.29

2.73 0.14 0.00 0.84 0.00

3.86 0.75 0.00 0.00 0.15

in Table 6, was greater than the level of demand in this division in

TECHNOLOGICAL

CHANGES RESIDENTIAL

SUPPORTED MARKETS

GROWTH

IN

In addition to changes in economic factors, changes in technological factors also affect the growth of markets. With the growth and technical improvements in pipelines and in NG underground storage during and after the war,8.12 utilities were increasingly able to purchase cheaper NG from Texas, Louisiana, and Oklahoma and to place it underground in the ENC and then substitute more of this NG for MG each winter when household demand peaked in the ENC. Since the cost of MG was generally much greater than NG, as reported in Table 7, this change tended to decrease the average cost of G in many states in the ENC. Available statistics suggest that NG was increasingly substituted for MG. Sales of MG declined, as did the cost of mixed G in many instances since an increasing proportion of cheaper NG was used with MG in mixed G. The economic welfare of households was improved by this transition. Externalities from the production of MG were reduced and savings from a decline in real expenditures for energy were realized by new and existing customers.

CHANGES

IN RESIDENTIAL

GAS

MARKET

BETWEEN

1952 AND

1972

Since detailed state-level data are available on NG underground storage capacity after 1952,‘* it is possible to examine the relationship between NG storage and the development of residential NG markets within states. The close relationship between NG storage capacity and Table 7. Gas prices in 1945 and 1952 in selected states in dollars per lo6 B.t.u., source: Ref. 9. Wellhead

State

f

Natur 1 gas 1945

1952 0.162 0.095 0.146 0.217 0.000 0.062 0.067 0.054

T-

t

Residential Manufactured Natu ral 1945

I I

Illinois Indiana Michigan Ohio Wisconsin Texas Louisiana Oklahcm

0.061 0.110 0.132 0.178 0.000 0.026 0.036 0.036

1.29 w 1.23 0.98 0.59 0.00 0.61 0.59 0.45 I

Gas 0.92

0.85 0.58 1.34 0.63 0.58

0.49

(

1945 1.90 1.57 2.48 2.07 1.85 0.00 0.00 0.00

L

1952 2.40 1.32 3.41 2.02 2.23 0.00 0.00 0.00

Mixc 1945 1.20 1.79 0.00 0.62 0.00 0.00 0.00 0.00

I

Gas

1952 1.00 1.42 0.00 0.00 2.40 0.00 0.00 0.00

Development

397

of residential natural gas markets

r

1000

600

-

Fig. 1. Reported NG storage capacity (solid line) and estimated storage capacity for Illinois based on residential deliveries of NG, source: Ref. 9.

residential demand for NG is exhibited in Figs. 1 and 2, which depicts storage capacity and expected storage capacity based on a regression of storage capacity on residential demand for NG for two key ENC states. Similar results obtain for the other ENC states. Within the ENC states, saturation of residential markets occurred first in Ohio and in Michigan, where underground NG storage was developed earliest. In 1952, underground storage capacity in Ohio and Michigan was 283 x 1012B.t.u., which was 36% of total capacity in the United States at that time. In the remaining three ENC states, capacity was 1.5 x lo’* B.t.u. Both residential demand and storage capacity began to level off, starting in 1960 in Ohio and Michigan. Residential markets in Illinois, however, had their greatest growth only after 1960, with the development of increasing amounts of storage capacity. Accelerated growth of NG residential markets followed. Statistics pertinent to growth in residential NG markets between 1952 and 1972 are presented in Table 8. This growth is partially explained by the more than 4-fold increase in the number of space-heating customers, who consume much more NG than otherwise similar customers. Although only 46% of customers were space-heating customers in 1952, 87.6% were space-heating customers in 1972. An 8% decline in the real price of NG, a more than 50% 600

r

200

I 1952

Fig. 2. Reported

1954

I

I

1956

1958

I 1960

I 1962

I 1964

I 1966

I 1968

I 1970

I 1972

NG storage capacity (solid line) and estimated storage capacity for Ohio based on residential deliveries of NG, source: Ref. 9.

398

JOHN

H. HERBERT

Table 8. Changes in the amount of natural gas sales and related statistics in East North Central region between 1952 and 1972, source: Ref. 9. Statistic Natural Space

Gas Sales Heating

bllar

1957 744

1962 1054

(1000s)

1889

3314

(1000s)

4104 0.75

(1012 Btu)

Customers

&xnnber of Gas Custars Constant

1952 421

Price

(lo6

Btu)

Year

1967 1381

1972 1649

5273

6704

7979

6091

6981

8202

9111

0.82

0.83

0.75

0.69

increase in constant dollar INC, the inexpensiveness of NG relative to competitive much greater availability of NG contributed to this growth.

FUEL

USAGE

IN HOUSING

UNITS

fuels, and

IN 1970

Data from the 1970 Census of HousingI in Table 9 indicate that 4% of the housing units for four of the five ENC states used CC or WD as their primary space-heating fuel in 1970, compared to 90% of the housing units 30 yr earlier. Utility G, as distinct from bottled G, was clearly the major space-heating fuel in all states. Not too surprisingly, Wisconsin, where the space-heating G market developed latest, had the smallest percentage of households using utility G as the primary fuel. Fuel oil/kerosene appeared to a serious challenger to utility G dominance only in this state. Table 9. Primary heating fuels in households in the East North Central region in 1970 in lOOOs,source: Ref. 13.

I State Illinois

Coal or Coke 271.4

I

I

Utility

Fuel Oil

wood 2.7

2,468.3

Kerosine Etc. 494.2

Gas

Electricity 105.4

Bottled Tank or LP Gas 137.6

Other Fuel 20.2

tine 1.3

Ohio

101.2

4.6

2,517.l

462.9

112.5

72.4

16.8

1.8

Michigan

59.0

5.4

1,856.2

583.8

67.1

69.5

10.3

1.1

Indiana

54.6

5.9

917.3

433.3

94.3

95.8

6.5

1.3

Wisconsin

29.7

6.8

654.9

521.3

24.8

85.6

5.3

0.5

G controlled a smaller portion of the cooking market than the space heating market. This is a distinct change from 1940, as depicted in Table 2. EL appeared to be a competitor to utility G in the cooking market despite the economic advantage of using G. This fact suggests either a distinct preference for EL over G for some customers, or the unavailability of NG in some portions of a state. In 1970, the cost of EL per 10’B.t.u was approx. 7 times the cost of NG in all ENC states.14 By 1970, the transition from the nineteenth century dependency on WD and the dependency in the first half of the twentieth century on CC were virtually completed and households were reaping the benefits. Table 10. Primary cooking fuels in households

State Illinois Ohio Michigan Indiana Wisconsin

I-L 1,670.6

3.1

1,258.l

5.4

778.8

3.3

511.2

7.4

in the East North Central region in 1970 in lOOOs,source: Ref. 13.

tie1 Oil/ Kerosine 7.7

Coal or Coke 11.9

Electricity 764.3

Bottled Tank or Lp Gas 149.1

Cther 0.6

N3ne 5.4

Development

of residential natural gas markets

CHANGES

AFTER

399

1972

In 1973, consumers in the ENC experienced the effects of the oil embargo. In 1976/1977, they experienced one of the coldest falls and winters on record, which may have seriously eroded income after the recession of 1974/1975. In 1978, they obtained tax credits for energy-conservation investments as part of the National Gas Policy Act (NGPA). In 1979, they experienced the threat of another oil embargo. For the ENC, the annual average price of NG increased systematically after 1973,” and a declining proportion of new homes came equipped with NG furnaces after 1971 since there were restrictions by utilities on new NG space heating hookups. In the Northeast Census Region,16 these events, along with increased coverage of energy issues by the media, apparently led to increased conservation activity by household members and improvements in the efficiency of household appliances. The same effects probably occurred in the ENC. A much larger proportion of householders in 1980 than in 1970 used EL as the major source of space heating and cooking energy.17 In the decade of the 1970s EL grew consistently in importance as NG had in the previous decade. Table 11 summarizes the consequences of the changes. Despite a 7% increase in the number of space-heating customers to total G customers, which would have been expected to increase use per customer to more than 190 x 10” B.t.u based on AGA estimates of use per unit sold, gas use per customer declined. NG prices, which had either fallen or remained relatively constant for more than 30 yr, almost doubled between 1972 and 1982. Truly, a new market had emerged.

Table 11. Change in natural gas consumption and related statistics between 1972 and 1982 in East North Central region, source: Ref. 9.

._

CONCLUSIONS

A variety of forces led to the dominant position of NG in residential energy markets in the ENC after the Second World War: improvements in gas deliverability, high opportunity costs associated with using alternative fuels, and reductions in energy expenditures for an improved level of service. This growth caused a transition in the economic and social conditions of households.4 The production of energy-based services in the household changed from a labor-intensive technology based on WD and CC to a capital-intensive technology based on NG. By 1972, moreover, the transition was virtually complete and sales to residential customers reached a peak. As distinct from NG, the level of use of EL in the household continued to grow after 1972. Although EL use has transformed the household and will continue to experience growth, it will probably never transform the household to the same degree that NG did or, at least, not at the same rate. Acknowledgements-The author would like to thank E. Burns, S. Bunsick, H. Clarius, and E. Kreil of the EIA, E. Herbert, and an anonymous editor for comments on earlier drafts and other support. The views expressed are those of the author and do not necessarily represent those of the Energy Information Administration (EIA).

400

JOHN H. HERBERT

REFERENCES

1. 2. 3. 4. 5.

M. H. Rose and T. J. Clark, J. Urban Hist. 5, 340 (1979). M. H. Rose, Technology and Cult. 25, 503 (1984). L. Stotz, History of the Gas Industry, Stettiner Bros., New York, NY (1938). R. J. Cohen, Technology and Cult. 17, 1 (1976). Bureau of the Census, U.S. Department of Commerce, “Census of Housing,” Washington, DC (1943). 6. Bureau of Economic Analysis, U.S. Department of Commerce, “State Personal Income 1929-1982,” Washington, DC (1984). 7. M. Williams, J. Historical Geog. 8, 13 (1982). Bureau of Mines, U.S. Department of Interior, “Minerals Yearbook,” Washington, DC (1938-1960). 98: American Gas Association, “Gas Facts,” Arlington, VA (1940-1983). 10. Bureau of Labor Statistics, U. S. Department of Labor, “Average Consumer Prices, Energy,” Washington, DC (1940-1953). 11. Bureau of Labor Statistics, U. S. Department of Labor, “Consumer Price Index,” Washington, DC (1940-1983). 12. American Gas Association, “The Underground Storage of Gas in the United States and Canada,” Arlington, VA (1952-1972). 13. Bureau of the Census, U. S. Department of Commerce, “Census of Housing,” Washington, DC (1972). 14. Energy Information Administration, U. S. Department of Energy, “State Energy Price and Expenditures Report 1983,” Washington, DC (1986). 15. J. H. Herbert and P. Garguillo, “Natural Gas Monthly,” Energy Information Administration, U. S. Department of Energy, Washington, DC (September 1985). 16. J. H. Herbert, Energy 13, 211 (1988). U. S. Department of 17. J. H. Herbert, “Natural Gas Monthly,” Energy Information Administration, Energy, Washington, DC (December 1983).