Wednesday, April 21, 2010

No Gas OPEC Now

The members of the Gas Exporting Countries Forum met earlier this week in Algeria and concluded that it is not yet possible to set up a worldwide natural gas cartel.  While this is not really a surprise since transportation difficulties don't allow for the same kind of global market that oil enjoys, it is an idea that might be off the table for a while.

short piece in the Wall Street Journal, summarizes the situation well.  The two most important issues are the lack of a global marketplace (LNG only represents 10% of global supply at this time) and the fact that there is no gas exporting nation like Saudi Arabia that is willing to suffer the opportunity cost of cutting production to drive higher prices.  Additionally, higher commodity prices, the ultimate goal of a cartel, would encourage the development of competing supply sources (like shale), which would have the effect of lowering commodity prices.

Each country has a different cost structure and export scheme.  Most notably, Qatar produces huge amounts of cheap natural gas because it basically is a byproduct of its highly profitable liquids production.  For Qatar to reduce natural gas supply it would have to cut production of liquids, which is largely unrelated.  Qatar isn't going to let that happen.

This cartel thing - it sounds good but it's hard to put together.

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