The huge price differential between natural gas prices in the U.S. and abroad is what is driving the effort toward exporting natural gas. The graph shows the price differential between the Henry Hub spot price (blue line), the European Import Price (orange) and the Japan LNG import price (red). Prices on the graph are measured from zero to $20 per million BTUs and the time scale moves only from 2008 to the present. Europe now gets most of its natural gas by pipeline from Russia while Japan requires LNG tankers.
Remarkably, as recently as 2008, the three prices were all exactly the same. This was during the run-up when oil was well over $100 a barrel. It also marked the end of the 80-year period when oil and gas prices ran in tandem. Ever since the first interstate pipelines were built in the 1920s, oil essentially set the price of natural gas. Gas was a by-product of oil development and the two fuels were interchangeable for most uses. But 2008 also marked the point when the fracking revolution began to have an effect. Natural gas prices in the U.S. have plunged from a high of $11 per mBTUs to a steady rate of under $4. In Europe, prices fell to $7 but have crept back up to nearly $12. Japan has experienced an even greater run-up, mainly because the 2011 Fukushima accident closed down its nuclear generation and replaced it with gas and coal.
The price differential is a magnet for U.S. exports. Building an LNG terminal and getting the required federal permits, however, is an arduous process. Already there is opposition in Congress, based on the premise that exporting gas will drive up the price to households and industrial users. The Department of Energy, on the other hand, argues that exports would probably only reverse the trend for shutting in wells because of low prices. And of course exports would do wonders for our balance of trade. Foreign policy experts are also saying that gas exports could break Russia’s stranglehold on Europe and improve our influence in the world.
Of course there are also risks. Japan may soon reopen its reactors, cutting its demand for gas imports. Russia is already planning to send Siberian gas to the Far East. And as LNG shipments become routine, the price differential will narrow. But that’s what international trade is all about, isn’t it? Where is David Ricardo when we need him?