The United States has been exporting natural gas at record levels this year, with exporters making huge profits from it and expected to continue to make huge profits due to continued demand from Europe. However prices at home have started to rise, again, because natural gas production is growing at a much lower rate than exports. One group of analysts he warned early this year that finally, US gas prices and world gas prices will converge. For some, this will be good news.
Currently, the gas supply and demand situation looks more or less out of control. Prices at home have fallen significantly, and exports are not increasing as quickly as they were in early 2022 because European warehouses are full.
Meanwhile, in the first ten months of the year, US LNG exporters exported 11 percent more goods abroad, and European exports increased by 150 percent, according to data from Kpler. quoted by Reuters.
It is Europe that is changing the situation of natural gas prices on a global scale because the Russian pipeline gas is not coming back anytime, while Europe has a long way to release it from natural gas. This means it will need more US LNG next year – this year, it has Russian gas until June. And this means that domestic gas prices will rise because production will continue to lag behind demand.
According to Reuters’ Gavin Maguire, this could stimulate a shift to alternative energy sources based on their economics. For the same price of electricity, he wrote, other low-carbon energy sources, such as solar and offshore wind, are already cheaper than natural gas power plants.
Related: Deep Impact of OPEC Cuts Biden’s Attempt to Lower Oil Prices
Indeed, Norwegian energy consultant Rystad Energy has also estimated that solar, in particular, is now 10 times more expensive to build in Europe than new natural gas generation capacity. Again, according to the equivalent cost of electricity.
The LCOE concept is a commonly used basis for promoting wind and solar versus fossil fuel generation capacity. However, many critics oppose the use of this metric because it can be very misleading.
First, LCOE ignores certain costs that actually exist. Second, it assumes a certain level of electricity generation that may or may not be visible because, ultimately, the output of the wind and the sun depends on the weather, and the weather is not a reliable, unchanging thing. Third and perhaps most importantly, LCOE does not take into account the backup baseload capacity required for each MW of wind or solar.
In other words, building more wind and solar capacity may end up requiring the construction of more gas-fired plants to be used as storage during solar nights, or on windless, windy days.
This is where federal subsidies for renewable energy come in. These can go a long way toward making wind and solar more economical than gas and coal generation. However the need for backup capacity will remain, which means the demand for gas will remain. And this will make the situation with gas prices and electricity affordability even more difficult in America.
“Natural gas prices in Asia and Europe are at R35 per cubic meter, compared to $8.20 per cubic meter in the United States. Due to the fundamentals that have been developed in the American gas markets, we believe that prices are about to rise and meet international prices in the next six months,” investment company Goehring & Rozencwajg. he said in May this year.
So far, prices haven’t risen much due to a variety of reasons, most notably a pipeline shortage in Texas that pushed gas prices to near zero earlier this month. Most LNG tankers in Europe also affected short-term prices, as did warmer-than-normal October weather across Europe. Yet demand for gas remains strong and will only increase as winter sets in—and it’s about to, in fact.
Interestingly, investment banks seem to expect rates to remain very low next year, with Goldman to guess the average of 5 million thermal units of Britain and the Bank of America sees at $ 4.50 per mmBtu. This year’s price has jumped due to record exports. Next year, this record will be broken if Europe continues to rely on US LNG, which will, due to the lack of alternatives.
However, even if the banks turn out to be correct and US gas prices remain below this year’s average, which so far has been $6.60 per mmBtu, it will be a significant increase in gas prices over the past few years. By itself, this may not be enough to encourage more wind or solar power. Federal funding, however, is another matter. They will certainly help the US energy transition, regardless of gas prices.
By Irina Slav of Oilprice.com
More read on Oilprice.com: