Map sale

Biden’s Gas Exports Create Imported Headaches

Placeholder while loading article actions

The law of conservation of energy is rooted in every high school science student: energy cannot be created or destroyed, only transformed or transferred. The global natural gas market represents the political version of this fundamental principle of thermodynamics.

European demand for liquefied natural gas (LNG) to replace Russian imports has now shifted to the United States So far, shipping US LNG to Europe has been a policy welcomed by President Joe Biden. Politically, it helped contain Vladimir Putin, and economically, it boosted America’s energy industry. It has also contributed to rebalancing the trade deficit. Now comes the biggest test. As the US gas market begins to connect to the European market, pricing issues in Europe are crossing the Atlantic.

On Monday, the benchmark US gas price hit a 13-year high, topping $8 per million British thermal units, more than double the 2010-2020 average paid by Americans of around $3.3 per million Btu. Although still a fraction of the more than $30 per million Btu European consumers pay, US prices are already feeling the pressure of demand on the continent.

Natural gas markets have always tended to be regional. Until recently, the US market was almost an island, connected only to Mexico and Canada by limited pipelines. But over the past six years, the US gas industry has slowly connected to the rest of the world with the opening of liquefaction facilities in Texas, Louisiana, Maryland and Georgia. Thanks to all these LNG terminals, the United States exported 17% of its domestic gas. production in January, the latest monthly data available. By next winter, the US Energy Information Administration, a government agency, predicts that one in five molecules of gas produced in the United States will be sold abroad. Twenty years ago, the United States barely exported gas.

Gas production in the United States has not kept pace with the surge in exports and stronger than expected domestic demand. As a result, US gas storage came out of the winter much emptier than expected. Last week, stocks were around 17% below the five-year average for this time of year. True, cold weather kept demand high and freezing temperatures in the key West Texas producing region hampered production. But there is also a structural element: US shale companies are not reacting to high prices as they have in the past, as they prioritize profits over volume. The number of gas rigs in America stood at around 150 last week, well down from around 1,000 13 years ago, the last time gas prices were above $7. per million Btu. Part of the reluctance to drill more is due to fears of a price crash if weather conditions reduce gas demand and the economy slows in late 2022 or early 2023. Another issue is skyrocketing inflation in the steel, a key component of gas drilling and other supply bottlenecks. Industry executives also aren’t worried about making life harder for Biden ahead of the midterm elections in November. Although the Democratic president has now embraced the oil and gas sector, he had campaigned on an ambitious environmental agenda, promising he would “end fossil fuels”. Wall Street has also become reluctant to fund the industry due to climate change concerns.

There is another fear: that Europe will not consume as much American gas as it expects today if the war in Ukraine ends soon. Privately, many American shale executives believe that Germany will ultimately stay with Russia. Without more drilling, the United States will struggle to replenish inventories this summer, especially if warm weather increases air conditioning demand. In turn, power plants will consume more gas to generate electricity. In the options market, gas traders are already betting on higher prices later this year and into next winter. For example, the amount of outstanding contracts for call options that will pay out if prices reach $10 and $15 per million Btu by March 2023 has recently increased. Although betting is not a forecast, it is an indication of the balance of risk. If these risks materialize, soaring prices could trigger a political storm next winter. In February, a group of senators, including Elizabeth Warren, wrote a letter to the Biden administration calling for “swift action to limit U.S. natural gas exports,” warning that without it, families will see “even greater increases important part of their heating bills”. Since then, Russia’s invasion of Ukraine has redrawn the global energy map and Biden has promised to do the opposite of what senators demanded: he went to Brussels and pledged to provide more of American LNG to help Europe disconnect from Russian gas.

Biden is unlikely to waver on his support for more US LNG exports, even if it means higher prices – and another inflationary headache. But it needs help from the shale industry, which has the advantage of geology: the prolific Marcellus and Permian gas basins. For most industry complaints about Biden’s often inconsistent energy policy, the truth is that the White House has already secured a new market for US gas exports to Europe. All that is needed is the extra gas. The Biden administration and the US shale industry need to sit up and make it happen.

More from Bloomberg Opinion:

• US energy independence will bring small comfort: Justin Fox

• Germany must cut Russian gas sooner, not later: Chris Bryant

• A better way to sanction Russian oil: Meghan L. O’Sullivan

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He was previously the Commodities Editor at the Financial Times and is the co-author of “The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources.”

More stories like this are available at bloomberg.com/opinion