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Creating a Cartel
Will We See a Natural Gas Version of OPEC?

Hydrocarbons abound! While OPEC discusses what to do about oil prices that have dropped below $45 per barrel, another group of energy producers is considering coordinating its efforts to help stay afloat in a flooded market.

Like oil, natural gas is plentiful these days, with supply well outstripping demand, and prices are at bargain basement levels. Spot liquified natural gas (LNG) prices in Asia started the year out around $15 per million BTU, and now are less than half of that, with some analysts predicting a further price plunge below $5 next year. For buyers (like recently nuclear-less Japan) the good times are rolling, but sellers are having a difficult time adapting to the bearish market. As the WSJ reports, some natural gas producers are talking about restricting supply to set a price floor:

Leaders of Nigeria and Algeria, at a recent forum in Tehran, said gas producers should come together and intervene in prices. Nigeria’s President Muhammadu Buhari called for “the formulation of a sustainable pricing mechanism that will guarantee fair and reasonable prices for both producers and consumers.”

…such practice is a novel idea for gas producers, where individual long-term contracts dominate and therefore supply cannot be altered easily by coordinating producers. But that’s changing with the increasing role of short-term sales in liquefied-natural-gas. Last year, almost 30% of global liquefied natural gas was traded on a short-term basis, compared with 5% a decade ago, according to the U.S. Energy Information Administration.

It doesn’t seem likely that a natural gas version of OPEC could accomplish very much. For one, the two biggest gas producers (Russia and the United States) won’t play ball. Russia isn’t an OPEC member, so it’s hard to imagine it shaking up its energy export approach in the gas market. In the United States, a wide variety of private companies are driving the shale gas boom, which precludes the kind of price collusion Nigeria and Algeria seem to be advocating.

There also appears to be less of a desire on the part of producers to trim output to drive up prices these days. No one seems willing to play the role of swing producer in the oil market, and it’s hard to imagine any natural gas producer making the kinds of necessary cuts (ceding valuable market share in the process) to cut down on the glut.

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  • Kevin

    I can easily imagine Russia joining, or indeed leading, a natural gas exporting cartel. Why wouldn’t they? If successful it would benefit them immensely.

  • Jacksonian_Libertarian

    Cartels are illegal in the US, for a good reason. They reduce or eliminate competition, and it is the “Feedback of Competition” that provides both the Information and Motivation which forces continuous improvements in Quality, Service, and Price in free markets.

  • Fat_Man

    OPEC is an organization that outlived its day about a generation ago. It was effective in the 1970s because there were many fewer producers at the time, and because of rampant inflation in the dollar. In the 1980s when Reagan suppressed inflation, many non OPEC producers came on line and there was rampant cheating by OPEC members. Oil prices rebounded in the last 15 years due to war in the Persian Gulf and a commodities bubble that drove up all commodities prices. OPEC had very little to do with other than pretending to lift when the trend was up. The trend has been down for a while, and there is little, if anything, that OPEC can do to change it.

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