Market Update: Natural Gas Emergence in the World Market and the Price Escalation that has Followed

What impact has world market expansion had on the domestic energy market in the US? To answer that question, we should first look at what has traditionally been a market defined by transactions. Natural gas, oil, and power have largely been produced here and consumed here from the inception of the fossil fuel industry until changes in government policy, over the last ten years, removed many barriers to international trade in US energy. US Government (USG) policies were relaxed to allow US sourced oil to be sold internationally, and within the last decade because of its abundance, the USG green lighted the export of domestically sourced natural gas. Prior to the explosive growth in the mining for energy, the US was heavily dependent on foreign suppliers to meet our needs. The tables were finally turned, for a short period, on that dependency when in 2019 the US become energy self-sufficient and surplus product was absorbed by international markets.

This trend has been halted and the cost of power, in most markets, is headed higher. Several forces are at work here. All, unfortunately, working to inflate the cost of power. Public policies that divert production of power away from the most efficient, highest density and most abundant fuels have had a dramatic effect on power costs in many western democracies, most notably Germany. Looking back to the year 2000, when Germany embarked on its large-scale and expensive overhaul of its energy generation, the residential electricity prices hovered around $.13 per kWh. Fifteen years later Germany’s combined solar and wind capacity of nearly 84 gigawatts had surpassed the total installed in fossil fuel plants, and by March 2019 more than 20 percent of all electricity came from the new renewables. Well-intentioned but perhaps overly aggressive in their conversions from fossil to green, they paid a price for the makeover, and by 2018 electricity prices more than doubled to approximately $.32 cents per kWh.

Similar forces are at work in California where new renewables have taken an increasing share of generation. This has translated into electricity prices rising five times as fast as the national average, and prices in California are now nearly 60 percent higher than the national average. Inevitably, any discussion of the forces at work that deprive us all of certainty in trying to plan an energy future zero-in on price and availability. Price is determined by many factors but reigning supreme is availability followed closely by input costs.

Consider these influences on Price and Availability:

US Natural Gas Enters the World Market

Natural gas, the dominant input fuel for making power in northeastern US, is now, officially in a ‘world’ market. This winter has solidified its position. In December 2021, thirty LNG tankers delivered their loads to European ports either replacing or supplementing supply that Europe would normally have sourced from Russia. Note this was before Russia invaded Ukraine.

Europe is experiencing a normal winter but not normal pricing. The cost per MMBtu of the natural gas that arrived by LNG was priced at the prevailing market rate which ranged from 10 to 20 times greater than the comparable US east coast price in the same time frame. With this huge expansion of the price band, US natural gas producers will look to permanentize their relationships in the European market and expand their export capacity beyond the Asian markets (which has been served for some time by western US gas producers).

Deteriorating Financial Conditions and Belt Tightening in the Oil and Gas Fracking Industry

Except for what goes into storage, about 90 percent of gas production is consumed within a few weeks, if not days, of its emerging from a well and entering a pipeline.

Mining for energy plummeted in 2020, and not due solely to the pandemic. The sudden and severe drop in demand came at a time when energy exploration and production budgets had been slashed due to belt tightening by the major industry players and the demise of many marginal players who, for years, had been selling product at prices injurious to their balance sheets.

Energy Transition

Europe, and particularly the UK and Germany, got ahead of the physical ability of their Energy Sectors to replace fossil fuel electric generation with renewables. In their zeal to make the conversion, hydrocarbon fueled power plants were shuttered, with years remaining on their useful life, and energy reliability became a second-string concern. This politically popular move away from the use of mineral energy has come to an abrupt halt in these two countries as consumers in each are facing monthly energy bills equivalent to what they would normally spend in year.

Energy Demand Inelasticity

A higher-than-normal price of energy can indeed price some end users out of the market or act as an impetus to conserve. But studies have shown such behavior to be at the margins—and what households and businesses typically do when energy costs soar outside the expected bandwidth is reduce expenses elsewhere. So, to count on higher prices punishing demand—that is an unlikely outcome.

So, if you operate a business and energy is a material component of your bottom line, what does the future hold?

As we have discussed, the factors influencing your cost of electricity and natural gas are more than likely to push costs higher than pull them lower. The ‘righting of the ship’ to enable traditional supply and demand forces to reign in energy prices are several years away from responding to the disequilibrium and market turmoil we presently face.