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The pipeline and storage assets are primarily supported by ....what type/price of revenue contract?

User Tarikki
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Final answer:

A guaranteed minimum price for natural gas, such as the one proposed in the bill by the U.S. Senate for an Alaskan pipeline, sets a price floor that can lead to higher prices, reduced demand, and increased supply. Unintended consequences might include a surplus of natural gas, inefficient drilling, and resource misallocation.

Step-by-step explanation:

The pipeline and storage assets are typically underpinned by revenue contracts that are fee-based or have fixed and variable components tied to commodity prices, such as the price of natural gas. In the historical case where the U.S. Senate passed a bill guaranteeing a minimum price for natural gas through a proposed Alaskan pipeline, the intent was to incentivize private firms to invest in drilling and pipeline construction. However, this kind of price control, also known as a price floor, can have several effects based on the demand and supply framework.

Impact on Price, Demand, and Supply

When a price floor is set above the equilibrium price:

  • The actual price of natural gas will not fall below the floor, which could be higher than what the market would naturally set.
  • The quantity demanded may decrease because the fixed price could discourage potential buyers who are not willing to pay the higher price.
  • The quantity supplied might increase, as producers are encouraged by the guaranteed minimum price to produce more natural gas.

Unintended Consequences

Potential unintended consequences include:

  • Surplus of natural gas if the quantity supplied exceeds the quantity demanded at the price floor.
  • Wasteful increase in drilling activities that may not be economically viable without the subsidy.
  • Distortion of market signals leading to inefficient allocation of resources.
User Abdelhak
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