In the wake of the recent Russian-Chinese natural gas deal, there have been any number of rosy predictions regarding declining prices. Consider this story over at oilprice.com:
There are far too many hedge words in this piece to become comfortable with it:
“For example, China has long been seen as a massive consumer of liquefied natural gas (LNG) – gas that is turned to liquid form and transported by super-chilled container ships. The deal with Russia could curb quite a bit of that projected demand.”
“This could dampen the demand – and ultimately the price for – LNG from the United States.”
“The Russia-China deal may change that.”
“the most expensive LNG projects may no longer be profitable.”
But despite the similar sounding headline over at Bloomberg,
towards the end of the story, the substantive counterpoints to the rosy outlook for lower prices emerges:
“‘This deal results in a slight reduction in the rate of growth in LNG imports but nothing that is going to keep anyone awake at night in Doha,’ (Tony Regan, energy consultant at Tri-Zen International, Singapore) said by e-mail. ‘The deal could actually lead to a call for yet more LNG. With Russian supply now booked, it will give the planners comfort to keep building out the domestic gas market and then we are likely to see them calling for more supply -– more LNG, more piped gas from Central Asia.’”
“Japan and South Korea, the world’s two largest buyers of contract LNG, will face tighter supplies by 2025, according to Gavin Thompson, head of Asia gas and power research at Wood Mackenzie Ltd. The Russia-China pipeline deal won’t give the Japanese or Korean buyers leverage in near-term LNG negotiations because they already have enough contracted supply through the start of the next decade,”
I find it more than a coincidence that the Russia-China 10-years-in-the-making gas deal was sealed in the aftermath of the Ukraine situation. Putin didn’t give up anything, and the Chinese were served their epiphany on a cold platter, realizing what the future of pricing held for natural gas.
Pricing control over the eastern EU pipeline has been tightened (helping Russia gain pricing control here will boost natural gas prices for Europe, thus justifying the necessary U.S. energy company infrastructure investment for exporting LNG to Europe) and China has Russia’s western pipeline booked, LNG prices may drop in the short term, but in the long term have nowhere to go but up, especially for Japan, Korea, Europe and, by transitive properties, the United States (U.S. natural gas suppliers will eventually get their wish in Congress and have export restrictions dropped, effectively siphoning off U.S. supplies for foreign markets and allowing prices to rise in the U.S. despite the widespread use of fracking used to remove natural gas).
Centralizing control over natural gas sources has one major advantage: pricing power for suppliers.
And as one energy industry generates a price rise, so will suppliers raise prices for other mainstream energy sources. Forget the nonsense you learned in economics class about consumers having a choice and substituting lower-cost alternatives. Now you are studying real-world economics, with heavily centralized energy sources limiting choices and raising prices.
* Questioning the idea of a U.S.-Russian alliance? Consider this tidbit from Bloomberg’s recent story, “Ukraine Crisis Drives a Quiet Lobbying Boom in U.S.“:
“Exxon has drilling rights to 11.4 million net acres (46,134 square kilometers) in Russia, it’s biggest single cache of drilling rights outside the U.S. The company also is planning Arctic drilling in an alliance with state-owned OAO Rosneft.”
The lobbying has been, as the headline suggests, “quiet,” since U.S. corporations do not wish a) the illusion to be broken and thus publicly reveal the close ties between them and Russia, nor b) to tamper with the charade of “strong” U.S. foreign policy against Russia. And despite its optimism regarding the decline in natural gas prices, oilprice.com peeled back additional information on the U.S.-Russian alliance.