This opinion column was submitted by Albert Lin, executive director with Pearl Street Station Finance Lab.
When it comes to making public policy decisions, there is almost always a debate over what is prudent in the long run versus what is expedient in the short run. This winter, the issue of who should receive liquified natural gas produced in the U.S. now that the former preeminent producer — the Russian Federation — is no longer a realistic or reliable supplier, will become one of the most heatedly debated topics. Filling the Russian void is tempting in the short run, but such a move is likely an overall negative for most Americans in the long run.
Let’s first accept the reality that public policy can at times significantly impact taxpayers. Since the Great Financial Crisis of 2008, political consensus has been willing to “socialize the losses” of many problems. Failed subprime mortgage lenders, Wall Street firms packaging leveraged financial products, insurance companies and automaker failings and student debt forgiveness all are emblematic of the issue. Many of these and similar societal problems resulted from a willingness to ignore long-term consequences and utilize short-term financial relief.
Now, for natural gas, it is most efficiently shipped via pipelines. However, when a producer shuts off or loses the ability to employ a pipeline, the next best alternative is to put it on a specialized ship under pressure and at low temperature. LNG ships require a natural gas terminal at the home port to take the pipeline natural gas and convert it into a liquid, as well as destination port access to convert the liquified gas back into a form suitable to be piped to homes and businesses. One of the key costs and time constraints is that it takes multiple years to permit and build such a terminal in the U.S. and Europe.
Natural gas producers in this country now see an incredible opportunity to sell gas to the European Union at prices up to five to 10 times higher than what can be obtained at home. The rest of the world is not unaware of the potential that high EU prices might bring. The financial window of opportunity appears to be this winter and maybe into the first part of next year.
After that timeframe, American suppliers must consider how to compete with lower unit costs and shorter distances becoming available on the European continent. American suppliers had little EU market share when Russia was a European supplier, but if other lower-cost suppliers begin to appear, how much market share can the U.S. suppliers ultimately achieve? How much capital would be worth the risk to invest for such a short-term opportunity? These and other questions must be answered by the relevant suppliers.
American consumers will foot the bill
The world has witnessed the Chinese Communist Party tightening its totalitarian control over China by the very public removal of former Premier Hu Jintao, the most Western-friendly member of its Communist Party leadership. So why is the United States turning its back on its most reliable Asian allies (South Korea and Japan) by shifting the total volume of its LNG exports to the EU? Asia previously represented two-thirds of the United States’ LNG exports, with the EU accounting for almost the remaining third. Now the proportions are reversed. This new reality has caused natural gas prices in Asia to rise from $19/MM BTU to $28.
If prices are now so much higher in the EU and Asia, what will this mean for Americans? The answer depends on how much higher the price increases. Right now, peak winter prices for the EU are so much greater than current fall prices that at least 35 ships are remaining outside of EU ports waiting for higher prices to arrive in a month or two. The natural gas owners are renting ships at considerable cost to do nothing but warehouse the natural gas for a better price later on. These actions will hurt a lot of people and are of the sort that motivate politicians to take control over free markets during times of war.
One area where the United States will be hurt the most is in electricity prices. Natural gas is now the primary technology for creating electricity in the U.S., representing about one-third of all electricity produced. Two-thirds of all residents in the United States purchase electricity from a legal monopoly. Less well-known is that almost all legal monopolies are allowed to pass the cost paid for fuels like natural gas on to their customers.
This policy enables extreme inflationary risks to customers with very high price volatility. If natural gas prices in the U.S. increase to try and match the EU, the entire cost increase would be paid by the end user of the electricity, and natural gas producers would financially benefit. There is currently a global wave of inflation primarily caused by shortages, and natural gas is one of those items in short supply.
A better alternative
There is a better long-term solution. Many German industries which were built on cheap Russian energy are likely doomed as Russia was their lowest-cost energy supplier. About 70% of natural gas was used to produce products for the world (not electricity and heat for German residents). The chemical, fertilizer, paper, metals and automotive companies relying on super-cheap natural gas cannot be competitive even with lower prices to come because the cost of ships and new pipelines will never come close to the Russian arrangement enjoyed for the past two decades. The United States should offer low-cost loans and permitting support to bring those industries from Germany to America.
German industrial expertise and technical skills are very high, and the world should not lose access to this talent. Germany needs cheap energy, and the U.S. is really the only country that actually makes it where it uses it, so the energy should stay at home where it’s most efficiently utilized. Politicians in Germany will certainly cringe at the idea of jobs going to Americans, but have you seen the demographics of Germany? Like many other European and Asian countries, they have a serious demographic issue where there are not nearly enough future workers to replace the ones retiring (unless they embark on a huge immigration campaign). Germany’s industries, along with the United States, could continue to have a bright economic future as top global economies. We must think about winning in the long-term and not just reacting to the short-term.
Albert Lin is executive director with Pearl Street Station Finance Lab which provides financial analysis on energy policy impacts and highlights motivations for major stakeholders.
