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Could a Natural Gas Cartel Emerge?


We’ve learned to loathe OPEC for oil. Will we have to deal with an OGEC for natural gas?

The oil market is global, which is a root cause of the economic and geopolitical briar patches in which the oil-intense U.S. regularly finds itself. Bomb a pipeline in the Middle East, blow over an offshore rig in a hurricane, or run up fuel demand in China and the global market will react. The results will soon show up at the corner gas station.

Not so with natural gas, according to a MIT report examining prospects for natural gas. Natural gas markets are regional and respond to their own dynamics. Transportation is one reason why. Oil is easy to move around, by pipeline or by ship. Natural gas can be moved easily overland by pipeline, but moving it over water by ship is far more cumbersome than moving oil over water. You have to chill natural gas down to a liquid state, load it into a tanker, then regasify the fuel once it’s reached its destination.

What if, however, a global natural gas market emerged? That question came up at a July 19 hearing of the Senate Energy and Natural Resources Committee, which examined the MIT report. Committee Chairman Jeff Bingaman, the New Mexico Democrat retiring from Congress next year, was worried about that.

Here’s why: Three countries hold the largest reserves of conventional gas – Qatar, Iran, and Russia. MIT’s study team ran a scenario for a global natural gas market, which showed “Russia and the Middle East becoming major suppliers to all three of the major regional natural gas markets – the U.S., Europe, and industrialized and emerging Asia.”

That, MIT dryly explained, would be “a cause for concern.” With Vladimir Putin’s mercurial hand on the valve knobs and with the Middle East being, well, the Middle East, MIT’s conclusion required no great leap of logic.

Would we really want to replay the OPEC movie for natural gas?

No, but there are important differences between oil and natural gas that would make it hard for an OPEC-like cartel – OGEC if you like – to put the gas market on a short leash.

First, as MIT energy guru Ernest Moniz pointed out to the committee, natural gas does not lend itself to “cartel behavior” as easily as oil does. Oil has a death grip on the transportation energy market. Gas, however, can be substituted in all its markets – power generation, industrial processes, building heat. If a natural gas supplier wants to play games, you could always burn wood for heat. If an oil supplier wants to play games, you couldn’t put wood chips into your car’s fuel tank.

Second, the dominance of Russia and the Middle East over gas reserves is not ironclad. The reason is shale. The U.S. is not the only neck of the woods where there are large reserves of gas in deep shale formations. The estimated size of the technically recoverable U.S. shale gas resource is 862 trillion cubic feet (tcf), equivalent to about 37 years of domestic consumption at current rates. Canada has an estimated 388 tcf. Mexico has 681 tcf, Brazil 281, Argentina 774, South Africa 485, and Australia 396. China could be the big tuna in the shale gas world, with 1,275 tcf.

If other countries develop shale gas, a big if to be sure, patterns of gas pricing and trade would change accordingly, weakening any would-be OGEC cartel ambitions. One of the big ifs is the potential environmental impact of shale gas production through hydraulic fracturing. France, for example, holds an estimated 180 tcf of shale gas, but the French government is blocking development as a result of those concerns.

Still, a global natural gas market would not be free of energy security risks, as the MIT report pointed out. China could try to lock down supplies through bilateral contracts with exporters. Control of pipeline routes gives leverage a la Putin to turn the valves for political purposes. Long supply chains create vulnerabilities for infrastructure – pipelines, gas liquefaction and regasification plants, tankers.

MIT’s conclusion is that a global gas market would be a net benefit to the U.S., provided there were sufficient diversity of suppliers and markets were transparent.

There are many issues with natural gas. The emergence of an OPEC-like cartel – an OGEC – don’t appear to be one of them, if MIT’s analysis is on the mark.

The Daily Green

One Comment on "Could a Natural Gas Cartel Emerge?"

  1. DC on Wed, 27th Jul 2011 1:28 am 

    What a load of crap. No wonder amerikans are so universally despised. You see, according to this article, if amerikan oil giants form cartels, manipulate markets, bleed govts dry to subsidize their business model, its ok. But if those evil Russians, or even worse, all those dirty arabs attempt to do the same in the marketplace, well, thats just …..wrong somehow. Besides, I wish amerikans would stop whineing about OPEC. OPEC is an amerikan oil cartel. Sure the arabs are sitting up front in the lobby, but when they ask if how may they direct your call, all the lines lead to Washington, New York and London.

    Nor can I swallow the whopper about if people dont like the price of natgas, they can burn wood instead. Really? if someone form MIT said that, then the reports of the sad state of amerikan edumaction are no exaggeration.

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