The United States and its natural gas have been vital for Europe’s attempt to fill its gas storage ahead of this winter season. Yet record U.S. LNG exports have led to a surge in domestic gas prices. The boomerang is coming back. When President Joe Biden promised the European Union there would be enough natural gas for its winter, EU politicians rejoiced and doubled down on Russian sanctions. A few months later, EU gas storage is full ahead of schedule.
Meanwhile, however, LNG prices have soared like an eagle, China is re-selling Russian LNG to Europe, and gas prices in the U.S. are three times higher now than they were a decade ago and up 95 percent on the futures market for November 2022 to March 2023. And most analysts in Europe are talking about a recession.
That U.S. LNG was not going to be enough was clear from the beginning. As energy analyst David Blackmon, for example, has repeatedly warned since March, there is plenty of natural gas in the ground in the U.S., but far from all of it is being extracted. There are, in other words, purely physical constraints to U.S. gas exports to Europe.
Then there is the price issue. Right now, U.S. LNG is competitive because of the insane curve the European gas futures market has been following as Gazprom squeezed Nord Stream 1 shipments in response to sanctions. But this does not mean U.S. LNG is cheap. In fact, it is not cheap at all, which is what swelled the EU’s gas storage refill bill to 10 times its usual.
Now, there is another price issue in the home of U.S. LNG. This is a problem that there were also warnings about earlier this year. In fact, earlier this year, investment firm Goehring & Rozencwajg forecast that U.S. natural gas prices were about to take off after European ones before too long.
The reasons for the surge were overall tight gas supply and U.S. producers’ new central role as biggest suppliers to Europe. Also, Goehring & Rozencwajg predicted U.S. gas production was nearing a plateau.
Right now, gas production is on a strong rise, so prices fell this week but remain much higher than they had been for the last couple of decades, prompting the beginning of what could become a major backlash against stronger LNG exports.
“We appreciate that the [Joe] Biden administration has been working with European allies to expand fuel exports to Europe. A similar effort should be made for New England,” a group of governors from New England wrote in a letter to Energy Secretary Jennifer Granholm this summer, per a Financial Times report.
They went on to ask Washington to help their states—Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont—secure enough liquefied natural gas for the winter. What this means is that the governors asked Washington to reduce exports and redirect some LNG to local consumers.
Granholm’s answer to the governor, per the FT, was to say that the administration was “prepared to use all the tools in our toolkit” to help, but she also added there were not going to be any “blanket waivers” from the Jones Act that effectively restricts transport between U.S. ports to only vessels that are U.S.-built, U.S.-flagged, and U.S-crewed. In other words, no foreign-flagged vessel could load LNG in Texas and ship it to Maine, which limits New England’s options.
This letter by the New England governors may be a sign of more trouble to come Washington’s way because of its ambition to help energy-starved Europe. Of course, this trouble would be nowhere near the proportions of the European disaster, thanks to the fact that the U.S. produces all the natural gas it consumes. Yet higher prices are not something consumers or businesses welcome, especially in the middle of a war on inflation.
“LNG exports have already resulted in substantially increased inflation via higher natural gas and electric power prices,” wrote the Industrial Energy Consumers of America group in a regulatory filing cited by the FT.
How bad high electricity prices are for business profitability and consumer spending can be clearly seen from a glimpse at Europe right now. Just because it can’t get this bad in the United States, after all, does not mean that it can’t get bad enough for Washington to start worrying.
For now, there are no indications that the administration is prepared to pressure LNG exporters into keeping more of their gas at home, not least because exports are already constrained by the Freeport LNG outage. But pressure from consumer organizations might increase as the northern hemisphere moves closer to winter and energy consumption climbs higher.
Price pressure on consumers is also playing its role: a lot of Americans are saying that while they are happy to help Ukraine and the Europeans in their time of hardship, they are not prepared to foot the bill for that hardship. One can’t really argue with that, especially if one wants to keep control—thin as it is—of Congress for the next two years.
By Irina Slav for Oilprice.com
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