Natural Gas Expansion and the Cost Of Congestion

With the emergence of new technologies such as hydraulic fracturing and horizontal drilling, large new deposits of oil and gas are poised to become economically viable. As this happens, substantially increased deliveries will make their way into the market, benefiting both producers and consumers. However, these potential benefits cannot be fully realized with the existing transmission capacity. Limited transmission capacity on key delivery routes creates bottlenecks that drive a wedge between the prices consumers pay and the prices sellers receive, lowering consumer surplus and reducing the incentive to develop the new deposits. A question of some policy relevance is therefore: How large is this wedge?