Econ 101 taught us increased supply = lower prices. That’s the main argument for new liquefied natural gas import terminals. Unfortunately, the Wall Street Journal warns things are a bit more complicated than that and we shouldn’t bet on LNG to reduce North American natural gas prices. This is Econ 202 stuff at least…
Amidst concerns about a potential North American natural gas supply crunch, several energy developers are betting big on new terminals to import liquefied natural gas into the United States market. Three terminals are proposed in Oregon, and they have generated considerably controversy and strong opposition from local communities.
There are many reasons to be concerned about imported liquefied natural gas, or LNG, natural gas that has been supercooled to -260 degrees F in order to turn it into a liquid ready to transport on specially-designed tankers from LNG exporting countries like Indonesia, Russia, Iran and Qatar. From increased dependence on foreign fossil fuels to increased greenhouse gas emissions, seized farmland for new pipelines and health and safety concerns, citizens of potentially impacted communities have found plenty of reasons to rally against LNG terminals and pipelines.
The principle argument to forge ahead with new LNG terminals despite these concerns is the assumption that increasing North American natural gas supplies with LNG imports will reduce prices. It’s a simple “laws” of supply and demand that increased supply will reduce prices, right? That’s what we all learned in economics 101, right?
Unfortunately, a recent front page article in the Wall Street Journal (April 18th) warns us that the economics of LNG is a bit more complicated than that. This is economics 202 stuff at least (the online copy is here, sub$cr. required).
The gist of the story is that we shouldn’t be betting on increased LNG imports to help lower natural gas prices in the US. Read on to find out why…
Unlike oil, which is easily shipped globally and has been a globally traded commodity for some time, natural gas has developed more regional markets separated by delivery constraints, each with different gas prices. LNG changes the game, and increased global LNG capacity is making natural gas a global commodity with a global price. That’s bad news for the United States, where natural gas prices are about half what Japan is willing to pay for a shipment of LNG, for example.
According to the WSJ article: “Today, a tanker of liquefied natural gas, or LNG, pulling into port in Japan can command close to $20 per million BTUs, roughly double the price of the U.S. benchmark.”
As with any globally traded commodity, the marginal price sets the price for everyone. If Japan is willing to pay $20 per million BTUs (mmBTU) for LNG, prices globally will float up towards this price, and that’s about what we should expect to pay here in the Northwest if an LNG terminal is built. We’ll essentially be linking our mostly regional market to an intensely competitive global market for LNG, where the price is set by the highest bidder.
It’d be foolish then to bet on LNG, for which international competition can drive prices up to around $20/mmBTU, to help lower Northwest (or North American) natural gas prices, which are now in the vicinity of $6-8/mmBTU. In fact, the very opposite could occur. If LNG prices set the marginal supply cost for LNG in the Northwest, domestic natural gas prices may even rise to this new marginal cost. That’s how commodity markets work, isn’t it (told you this was Econ 202 kind of stuff)?
In short, the main argument for new LNG terminals in North America (and here in the Northwest) is that they will help reduce natural gas prices regionally by increasing supply. Problem is, that’s not how this competitive global market works. Instead, we’ll merely be hooking ourselves up to another global market for a foreign fossil fuel and put ourselves in a competitive bidding war with Japan, Korea, India, China, Spain, and others to see who lands that next shipment of LNG. Not exactly a competition I’d like to get into.
Oh, and did I mention that there’s talk of forming a new cartel of LNG exporting countries, just like OPEC, to manipulate the markets to exporters’ advantage. The Department of Energy’s Energy Information Administration cautions:
“One risk that cannot be ignored is the likely formation of an LNG cartel, given that so few countries control such a large portion of the world’s stranded natural gas reserves, and its power to affect LNG prices.”
This was new stuff for me - I thought the old Econ 101 argument seemed pretty sound - and I didn’t expect this kind of warning to come from the Wall Street Journal of all places. Seems like we’ve got yet another reason to be cautious about proposed LNG terminals in Oregon and elsewhere.
[Graphic credits: LNG terminal map from MSNBC; LNG tanker and terminal from LNGWorldwide.com]
Subscribe by Email!
Subscribe by RSS!
Share on Facebook
The only other issue is that North American supplies are limited and without LNG prices will rise anyway. Also, without LNG we will not have the lowest carbon fossil fuel for use in any energy transition.
Hopefully they will form a “natural gas OPEC.” All else equal, cartels and monopolies are bad for the consumer - they restrict quantity to increase price. This is good news if you’re interested in reducing consumption. The downside, of course, is that all the extra profit generated goes into the pockets of the monopolist/cartel members.
In general, as far as natural resource extraction goes, environmentalists should prefer a monopolistic model. The trick is getting the extra revenue generated into the right place. We could do that with a tax on the monopolist, but the simplest way is to nationalize natural resources. Then all that extra profit could be invested in clean energy technology, or whatever else you value. In Venezuela, an OPEC member governed by a socialist, that money is being used for social programs.
Viva Chavez…
The US will still have a lot of gas reserves compared with larger LNG importers such as Japan. We should be able to use that time to employ LNG as a transition fuel.
As for nationalized resources, I recall that Mexico did similar to Venezuela. Then the oil prices dropped and so did the services.
Mr. Tinker is out of his mind. I don’t think he has any clue what energy means to the American economy. Chavez is quite effectively destroying his country’s resource base and is NOT efficiently or effectively investing in social or economic programs that will aid in the long term development of his country. Shoving cash in people’s pockets and handing out free gas doesn’t constitute good developmental policy making.
The US is doing a lot to develop its LNG import capacity…but remains one of the only markets in the world that prices gas with gas. The author of the article is mistaken when he mentions a global LNG price. The overwhelming majority of LNG cargoes on the water are part of long term contracts indexed to OIL. At least in the short term, the US may well not need all of the capacity it is aiming to develop, but people who think that zero or even near zero emissions from energy production are achievable in the near future are simply living a pipe dream. For that reason, more capacity may well be justified. What the world natural gas industry needs is to move toward efficient market function - that means gas on gas competition and true transparency.
In Fullerton the busses run on something carried in a dog house on the top. I don’t know if it is propane or LNG. Either way, it is a lot more available than oil.
I have seen cars and pickups with a tank. So the modification from gasoline to something not too difficult