Gas Exports Boost Prices for US Consumers

September 18, 2022

Barrons (paywall):

The debate is now settled: Rising exports of natural gas have helped lift U.S. prices to their highest levels in well over a decade. By fueling sky-high gas prices, liquefied natural gas exports are boosting utility bills for homes and businesses, adding lighter fluid to the nation’s inflation crisis. Yet as gas consumers suffer, U.S. drillers are making more money than ever—revealing that what’s good for the oil and gas industry has been lousy for the American economy as a whole.

As the U.S. exports more and more gas, there’s less supply left for domestic consumers. Gas utilities, power companies and gas-dependent industries now must compete with one another for the remaining gas supplies. The bidding war has not only lifted prices, it’s also depleted gas stockpiles well below their five-year average, raising the specter of supply shortages next winter.

In short, the U.S. is exporting more and more natural gas, and importing higher prices as a result. If you’re looking for concrete evidence of this dynamic, look no further than what happened after an explosion at a massive gas export project. 

When it’s operating at peak capacity, the huge liquefied natural gas plant in Quintana, Texas, consumes about 2% of all the natural gas produced in the country, chilling and compressing the fuel so it can be exported in massive oceangoing vessels. But on June 8, an explosion rocked the plant, which is operated by Freeport LNG. Thankfully, no lives were lost, but the plant was shut down—instantly sending both U.S. demand and prices for natural gas plummeting. By the next day, benchmark gas prices had fallen by a whopping 12%.

Less than a week later, Freeport announced the plant would remain offline until late in the year, not just for a few weeks as originally anticipated. Once again, gas prices fell—this time by roughly 16%.  On Aug. 3, the company claimed that the facility could ramp up as soon as October, earlier than feared, and gas prices soared. Then, just last week, the company pushed Freeport’s anticipated restart from October back to November, and the prospect of a one-month delay in Freeport’s demand sent gas prices falling yet again

It may seem surprising that a single export facility could send the U.S. natural market into such gyrations. But gas markets are sensitive to even tiny shortfalls and surpluses. Nobody wants to be caught short of fuel when they really need it. Anything that can swing demand by even a percent or two can have outsized effects on prices.

If you need more evidence of the impact of natural gas exports on prices, just compare supply and demand fundamentals for the year leading up to February 2020 (the last pre-pandemic month) versus the year leading up to this May (the most recent month with full federal data). Annualized production rose over the period, while domestic consumption remained roughly flat. Yet LNG exports almost doubled—a surge that tightened U.S. gas markets and doubled the price that U.S. consumers pay for the fuel. 

The growth of global demand for U.S. LNG can be tied to many market forces, including the shortfalls in Europe due to Russia’s manipulation of European Union gas markets. Sustained high demand in wealthy Asian nations has contributed to export growth as well. And so has the U.S. gas industry’s dogged determination to ship its wares to the highest bidder, foreign or domestic. 

Russia’s role has been particularly critical in the rise of global LNG demand. As Russia choked off gas shipments to Europe, EU buyers have turned to global LNG markets to make up the shortfall. Global LNG prices rose in response, and U.S. LNG companies ramped up output, shipping more cargoes to Europe. But Russia responded by further clamping down on gas supplies to the EU—a vicious circle that has hurt Europe’s economy even more severely than it has harmed America’s.

There’s little sign that U.S. gas prices will ease in the coming years. Freeport’s demand will be back online soon enough, and there are three other massive LNG export projects under construction, with more than a dozen of others waiting for financing.

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