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Crude Economics
LNG Prices Are Plummeting

Oil’s precipitous price drop has been well covered by the media, in no small part because its effects are so ubiquitous. One less-talked about consequence is the rapid drop in the price of liquified natural gas (LNG), which in many markets is tied to crude. LNG is now selling for almost half of what it was last September, as the WSJ reports:

The price of LNG, a key fuel source for power generation particularly in northern Asia’s economic powerhouses, fell to $7.45 per million metric British thermal units on January 28, according to the Japan/Korea Marker published by Platts, a pricing agency, its lowest level since June 2010.

Just a year ago LNG—natural gas that has been supercooled to a liquid at minus 160 degrees Celsius so it can be transported on tankers—was trading at around $20 a mmBtu in Asia. As recently as October it was trading at around $14 a mmBtu.

It would be difficult to overstate how beneficial this is for Japan, which in the wake of Fukushima closed its nuclear reactors (which had supplied some 30 percent of Japan’s power needs) and had to scramble to meet its energy production needs, in large part through expensive LNG imports. Gas replaced more than 40 percent of Japan’s nuclear power after the drawdown, and it did so at great cost. Prime Minister Shinzo Abe likely can’t believe his luck, then, that the price of crude—and eventually LNG—would crash so spectacularly.

This affects America, too. Thanks to fracking, the U.S. is sitting on copious amounts of natural gas, resulting in extremely low prices (somewhere in the region of $3 per million Btu). When Asian LNG was selling for $15 per mmBtu, there was an understandable push to build up LNG export infrastructure to start selling U.S. shale gas abroad. That logic is looking much shakier now: liquifying, shipping, and then regassifying natural gas adds some $5 per mmBtu, which under today’s prices would no longer be competitive in Asia.

This doesn’t mean America’s LNG future is cooked. Europe is very interested in diversifying its supply away from Russia, and Asia wouldn’t mind finding a new supplier, either. Moreover, there’s no guarantee that prices will remain as low as they are today. Building out the export terminals needed to export U.S. LNG takes time, and while today the picture doesn’t look as rosy as it once did, plenty could change in the next year or two. The crude price crash taught us that, after all.

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  • LarryD

    I’m not opposed to building the infrastructure to sell LNG abroad. But I want it payed for by private investors, putting their own money on the line, without government guarantees. Which is the only way to insure it will be built when it makes economic sense to do so. Contemplate what happened to the rail industry in the US in the early 1800s. Easy money, building track too fast, when the bubble crashed, it triggered a recession that echoed all the way to England. Note that the problem wasn’t that the rail lines weren’t useful, but that they were build out too fast, before they could be properly utilized.

    There is the problem of the greens obstructionism, though. Haven’t come up with a good answer to that, yet.

    • GS

      Well, it should be done judiciously, for there is not only an economic interest, but a national security interest as well: propping up the allies like Poland, for example.

      • LarryD

        There is also the problem of where to build the terminal(s). You don’t want LNG tankers having to go around the tips of South America or Africa. And the Panama Canal can’t handle the biggest ships. We want to be able to supply both Japan and Europe, this all argues for terminals on both costs. But the greens control California, and the other West Coast states aren’t good prospects politically, either. Texas and the southern East Coast states provide access to the Atlantic, the Pacific terminal may have to be sited in Canada.

        The greens will do everything to obstruct, just like with the Keystone XL.

  • Jacksonian_Libertarian

    This is actually a better scenario for America, as long as energy prices in the US are driven way below world prices, American industry and consumers with enjoy a competitive advantage over the world.

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