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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 negative 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 18) 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.  

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.

Originally posted to WattHead on Tue Apr 29, 2008 at 01:04 PM PDT.


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Comment Preferences

  •  Tip Jar (15+ / 0-)

    collecting tips to help pay for LNG shipments... $20/mmBTU.

    Check out to find links to a broad coalition of citizens working to keep LNG out of Oregon.  The Northwest can do better than LNG.

    •  A few corrections (1+ / 0-)
      Recommended by:
      Jim W

      First, neither Iran nor Russia export LNG now. Russia will, in the near future, from Sakhalin, but Iran is unlikely to for many years

      Second, the US WILL need LNG because North American supplies of gas are now in decline, and LNG is the only alternative that exists - unless you manage to cut demand sharply.

      Third, most LNG is traded in long term contracts with price formulas that vary, but not as much as spot prices. The share of LNG that is traded on the spot market is small and likely to remain so, and is unlikely to drive prices (it's just enough to take advantage of temporary differences between the 3 big regional markets - Europe, Asia, North america)

      In that context, prices for natural gas WILL increase in the US, and the more LNG is available, the less likley this will be to go sky high.

      •  How much capacity already in long-term contracts? (0+ / 0-)
      •  Just was reading about Iran wanting to (0+ / 0-)

        form an "OPEC" for natural gas producing nations. There was much more about pipelines, Russia, Iran, China, Pakistan, Sri Lanka

        Having followed the 'pipeline' thing for a short time from a pedestrian point of view my condensed version is that control of the pipelines R essential. That China has been working diligently to 'make deals' including providing arms and military training to solidify pipeline negotiations in world wide. If you have 'gas', China wants your 'ass'. India and Pakistan are moving toward China because they see the USA and Russia loosing out.

        Do get some sense of how control of these pipelines effect EU [NATO?].

        Anyway China has made huge in-roads in both SAmerica and Africa, as well as Central Asia.

        Although the 'ins and outs' are very complicated and much above my pay grade, I am seeing that "Iran" is holding some major chips. Wondering about the pipelines south of the Panama Canal running to the Pacific and China widening the the Panama Canal for larger ships.  

        "...fighting the wildfires of my life with squirt guns."

        by deMemedeMedia on Tue Apr 29, 2008 at 02:39:49 PM PDT

        [ Parent ]

      •  Thanks for the clarifications (0+ / 0-)

        You know way more about these markets than I do Jerome.  

        All I know is that from an Oregon perspective, we're pretty confident we can do better than LNG.  Conservation, efficiency and renewables are our future.  LNG is at best a temporary side trip on the path to a clean energy future.  I'd rather not invest billions in a multi-decadal infrastructure investment that heightens our dependence on fossil fuels, especially imported ones.  You'd think we would have learned our lesson from oil...

        I kind of feel like the whole "we need LNG to kick the coal habit" is kind of like saying to a heroin addict, "don't worry, we'll just get you hooked on this methadone stuff."  

  •  peak natural gas 2010 - 2012 or so (6+ / 0-)

    Natural gas supplies will peak in the 2010 - 2012 timeframe. We either get free of that stuff, using renewable electricity for ammonia production and a combination of conservation and biomass for heating, or we starve and freeze. It's just that simple.

     Oh, and "our" natural gas in Trinidad is now being shipped to Japan - the weak dollar means we get outbid on the global market for NG. Do LNG terminals liquefy as well as deliquefy? If so they could be used to export our currently cheap gas ...

  •  interesting (0+ / 0-)

    It certainly seems like all the LNG projects in NJ and NY are being killed.

  •  Interesting ... (0+ / 0-)

    Resulting from falling dollar????

  •  North American Peak Natural Gas (1+ / 0-)
    Recommended by:
    Roger Fox

    If we're really approaching North American peak natural gas, it might still make financial sense to link our regional natural gas market with the global one...because if we don't, the consequences might be an even larger price rise.

    Ideally though, we'd find a way to stop burning stuff that we dig out of the ground.

  •  Great diary (2+ / 0-)
    Recommended by:
    WattHead, bfitzinAR

    Proponent of new LNG import facilities haven't looked at the global market in the short run or the long run.

  •  they tried to make a terminal in Eureka, CA (2+ / 0-)
    Recommended by:
    WattHead, bfitzinAR

    but to do it they would have modified the use of the harbor to the point that local fisherman would have been screwed. so they got run out of town.

    •  Well now they've moved north! (0+ / 0-)

      To the Columbia River estuary (two proposed terminals) and Coos Bay (one proposed) in Oregon!  That's what we're fighting now.  Californians succeeded in keeping LNG off their shores, but just shunted the pressure north to Oregon (and BC) and south to Baja California, where a Sempra energy LNG terminal is scheduled to open later this year.

      Ever feel like we're playing a giant game of "Whack-a-Mole"?!

  •  When Warren Buffet opened a new gas pipeline (3+ / 0-)
    Recommended by:
    dougymi, Roger Fox, WattHead

    in Colorado a few years back, the day after the pipeline went into service, natural gas prices DOUBLED - in Colorado.

    Why? The cost levelized with what the market would bear - that is, Californians pay a lot more for nat.gas than Coloradoans, and so more gas left Colorado to go to California. If Colorado wanted to keep that gas close to home, they'd have to pony up.

    I've been watching for years as our utilities brought on the slow-motion train wreck that is LNG. You think energy is expensive now? Wait til we're paying Japan's rates for gas. The WSJ nailed it dead-on, except that this hasn't been news in the energy business for, oh, going on 6 years now.

    The utility business is a great scam, if you're on the receiving end of distribution revenues.

    Thanks for the diary.

    by mateosf on Tue Apr 29, 2008 at 01:38:44 PM PDT

    •  Flip side happened in TX way back when - (0+ / 0-)

      gas prices in TX had a "floor" - we sold it out of state cheaper, don't ask me how that worked - something about interstate rates being controlled federally.  I guess because you can only use so much gas, what wasn't used domestically got sold elsewhere.  Ultimately they got rid of the floor.  Of course, that led to other kinds of price fixing.  TX is nothing if not bidness friendly.

  •  Lobby U R reps for solar and wind (1+ / 0-)
    Recommended by:

    and polywell fusion.

    FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

    by Roger Fox on Tue Apr 29, 2008 at 01:47:56 PM PDT

    •  And bioconversion. That's a (0+ / 0-)

      specialized form of biomass - rather than a "normal" 48-hour fermentation process to get alcohol from garbage, sewage, chicken litter, etc, the stuff is heated to plasma, then cooled (creating electricity from the waste heat) to the point it can be fed to anaerobic bacteria, which release ethanol and water vapor.  Bioconversion processes a batch in 8 minutes instead of 48 hours and has no (zero, zip) air or water polluting emissions.  Since the waste heat is used to generated electricity, you also don't have the thermal pollution as you get with nuclear plants.  And the plants are modular builds - 2 years for a full-sized plant, but you start getting power/ethanol after 18 months.  (Unlike the 5-year build on a fossil fuel plant or the 10-year build on a nuke plant.)

  •  I don't think it's as large a problem. (0+ / 0-)

    You are correct in your analysis, assuming that all we were doing was linking existing natural gas capacity with the construction of LNG plants.  If that was the case, then yes, price would equalize, probably to our disadvantage.

    However, the vast majority of LNG gas is stranded gas.  It has no (or little) market at present.  From the giant Qatari gas fields that sit undeveloped due to no need for more local energy, to the Nigerian oil fields where gas is simply flared, this is gas that otherwise wouldn't see the market.

    LNG is going to bring a ton of previously unavailable gas capacity online, and that's going to drive down prices (in the short run.)

    Of course, reducing energy prices can also increase demand, thus leading to higher prices down the road, but that's the eternal curse of cheap energy.

  •  Repeat after me: (1+ / 0-)
    Recommended by:

    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.

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