As we all know, fear leads to anger, anger leads to etc. And some of that anger is being directed at the new guy — or, liquefied natural gas in this context. In the past five years, the U.S. has gone from essentially zero exports of LNG to representing a tenth of global trade. Cue calls for Washington to step in and stop those cargoes departing American shores, leaving more (and thereby cheaper) gas at home.
We urge you to take immediate action under the Natural Gas Act (NGA) to prevent a supply crisis and price spikes for consumers this winter by requiring LNG exporters to reduce export rates in order to allow U.S. inventories to reach the 5-year average storage levels.
That’s the opener of a recent letter to Energy Secretary Jennifer Granholm from Industrial Energy Consumers of America, a lobbying group. And in one, narrow respect their logic holds. LNG exports are clearly the big new factor in the U.S. gas balance. By providing a link to Europe and Asia, it connects the largely self-contained North American system to whatever fluctuations occur elsewhere.
As desperate buyers bid for U.S. LNG cargoes, so gas that might have gone into storage and thereby suppressed prices leaves instead. And so a little desperation creeps into domestic futures, too. Even President Vladimir Putin’s, er, soothing words about helping out Europe this winter appeared to knock U.S. gas futures down on Wednesday.
Tempting as it is to fix this by turning off the big outlet taps on the coast, that would be a mistake. Yet Granholm’s ambiguous comments Wednesday about potentially revisiting the policy of allowing U.S. crude oil exports suggests such short-sighted thinking may have traction in the White House.
For one thing, $6 gas remains low compared with history. Prior to the shale boom, double-digit prices were common. Overall, gas bills ate up just 0.3% of personal disposable income on average through the first eight months of 2021, less than half the level of 2008. Indeed, given the perfect storm of Texas’ winter freeze, California’s hot, dry summer, recovery from Covid-19 and investors imposing discipline on drillers, $6 looks pretty reasonable. Even the sharp nature of this rally doesn’t stand out particularly.
One reason even LNG doesn’t make U.S. gas prices dance completely to Europe’s tune is that export capacity is already operating pretty much flat out. Once capacity has been reached, even the most extravagant bid can’t tempt another cargo to head east. Possibly the current price squeeze could slow approvals for new export capacity, but relatively little is due to be added in the next couple of years anyway.
Which segues into the big reason why President Joe Biden should steer clear of closing the U.S. gas window: He needs more gas.
The ambitious renewable-energy buildout envisaged in Biden’s budget plan ultimately requires the arrival of the age of batteries. In the meantime, though, it needs gas to balance intermittancy, as even California will tell you.
Closing off the LNG outlet would undoubtedly cause gas prices to plunge, providing short-term relief. But it would also choke off investment in new supply, especially from dedicated gas fields. That would both set up future tight supply — meaning the problem has merely been deferred — as well as tying it more closely to the vagaries of oil, as associated gas would become even more dominant at the margin. In the meantime, the economics, credit and credibility of the U.S. LNG business would have been trashed. Good luck signing future contracts.
Moreover, if Biden is really intent on making nice with Europe and confronting Putin, then cutting an LNG lifeline would be an odd move, especially if it left attendees of the upcoming UN climate conference in balmy Scotland freezing in the dark. At home, it would hand ammunition — as if any were needed — against Biden in states where gas is a big business. That includes Pennsylvania as well as West Virginia, home to Senator Joe Manchin.
As it stands, the spike in natural gas prices would be best managed the same way we handled Covid-19: with temporary, seasonal aid for those least able to afford the impact of an unexpected storm. Importing panic from across the Atlantic would be the worst trade of all.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.
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